Life and debt

More consumers considering insolvency to deal with crushing loans

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Budgets are fraying at the seams as interest rate hikes and rising prices pile on top of all the other costs of living, and insolvencies — bankruptcies and consumer proposals — have surged back to pre-pandemic levels as a result.

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Budgets are fraying at the seams as interest rate hikes and rising prices pile on top of all the other costs of living, and insolvencies — bankruptcies and consumer proposals — have surged back to pre-pandemic levels as a result.

More precisely, consumer proposals — the more popular choice for insolvencies for the last decade — have jumped in number.

At the end of 2022, this form of insolvency, involving paying back some unsecured debt without interest charges, rose 20 per cent across Canada, and 19 per cent in Manitoba compared with 2021.

All told, 2,039 Manitobans entered into a consumer proposal last year while 735 declared bankruptcy, federal government statistics show. Combined, that’s the highest figure since 2018.

“We’ve certainly seen an influx over the last few months,” says Tanya Reynolds, licensed insolvency trustee at MNP in Winnipeg.

“That’s not surprising given the rise in inflation and rapid interest rate hikes.”

Although variable mortgages and home equity lines of credit debt — most impacted by rising interest rates — are not eligible for insolvency proceedings, these have often become deeply burdensome for some households, causing a cascade effect.

“They may now be finding those payments are eating away at their budget,” Reynolds says. “Then you need to start cutting back on things you need to pay for — like groceries.”

MNP’s Consumer Debt Index from January revealed 57 per cent of Manitoba residents regret the debt they’ve taken on — a record high — while seven in 10 note higher interest rates are affecting their ability to pay debts, the highest in Canada.

Debt regret can come from many places, including recent ‘revenge spending’ after the pandemic. Case in point is a survey from RBC about holiday spending, finding 47 per cent of Prairies respondents — the highest in Canada — overspent with one-third indicating it will take until April to get back on track.

“Money doesn’t stretch as far as it did just a year ago,” says Rachel Megitt, vice-president of term investments and savings at RBC InvestEase. “All you have to do is walk into a grocery store to experience the pinch of inflation.”

For some, the current environment is an annoyance, as recent economic data show, with consumers continuing to spend and businesses still hiring.

Yet millions of others are facing challenges, especially as pandemic supports have disappeared with some Canadians having to pay a portion of it back — another source of debt.

“When the insolvency numbers start to reach the pre-pandemic numbers, it shows us that all those supports were a band-aid,” says Sarah Stachiw, spokesperson for Bromwich + Smith, a licensed insolvency trustee service provider.

“We think rising insolvencies so far are just the tip of the iceberg.”

Amid higher rates, mortgage and interest payments are rising, many financially stressed households end up turning to higher-interest alternatives, Reynolds says.

“There are people supplementing income using credit cards because mortgage and line of credit payments have gone up,” she says. “So, they’re using the credit cards to keep up, and at some point, that becomes unsustainable.”

If the struggle sounds familiar, a first call should be to your financial institution for advice. “Solicit advice regarding what options are available from you,” Megitt says. “There is a lot of empowerment and comfort in understanding those where you start to feel a little less stress.”

Your financial institution may or may not be able to provide a lower interest consolidation loan for high-interest debt or provide payment holidays for mortgages, and you won’t know if you don’t ask, she says.

What’s more, a financial adviser can review expenses, debt and income to develop a budget and find extra cash to gain more traction against debt.

But consumers have other options for help beyond their bank or credit union.

Organizations like Community Financial Counselling Services and Credit Counselling Society are non-profit providing debt repayment plans often with no interest—though these generally involve paying back the full amounts owed.

And some consumers may have no reasonable way to pay debts in full without prolonged hardship. For those, a visit with a federally regulated, licensed insolvency trustee may be worth their time.

“Sometimes a formal insolvency is going to be the best option to get them right-side up and moving forward in a better financial light,” Reynolds says.

Even if a consumer proposal or filing for bankruptcy aren’t the right fit, a trustee can provide consumers with all their debt repayment options, from getting creditors to reduce interest rates to helping build a workable budget.

For some, insolvency may be their best option — stigma aside.

“No one wants to be in a situation where they’re unable to pay their debt,” Stachiw says.

But trustees provide no-obligation, free advice. And if, for example, a consumer proposal is appropriate, an individual can reduce unsecured debt obligations by as much as 80 per cent, making set payments over 60 months, or less.

Bankruptcy is even shorter—though it remains on your credit report longer — often involving paying back less over nine months, Reynolds says.

“People are stressed about debt and even more so about the idea of insolvency, so the hardest part is often making that call for help,” she says.

“But it’s just a conversation, and the whole point is to ensure whatever decision you’re making is an informed one.”

History

Updated on Monday, February 27, 2023 8:47 AM CST: Corrects that Rachel Megitt is vice-president of term investments and savings at RBC InvestEase

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