Rising household debt is leaving Canadians more vulnerable to
interest rates and economic volatility, according to a January 2016
report from the Parliamentary Budget Office ("PBO"), "Household Indebtedness and Financial
Vulnerability". Based on PBO projections, household
debt-to-income ratio will move in an upward trend over the next
five years as interest rates rise toward "normal"
In the third quarter of 2015, total household debt reached 171
per cent of disposable income, meaning that for every $100 of a
household's disposable income, it paid out $171 in debt
obligations. This is the highest level in 25 years, and among G7
countries, Canada has become the most indebted country. This rise
in household indebtedness is linked to the currently low interest
rates and higher housing prices
What happens if Canada experiences a sudden economic shock, such
as a recession with significant unemployment? The falling loonie
affected many Canadian winter holiday travel plans. Canadians have
also paid close attention to the plummeting price of oil, which is
wreaking havoc on the economies of the western provinces. There is
speculation of a potential bubble burst in the Toronto and
Vancouver housing markets.
If a personal misfortune, such as job loss or illness, is
coupled with any of the economic outcomes above, it could force
many Canadians with precarious debt loads into insolvency.
Households with the highest levels of debt in the PBO report
were those headed by people between the ages of 31 to 35. This is
due to borrowing based on the natural cycle of consumption and
aging, which has traditionally been: buy a first house, increase
income as one ages, and then pay off mortgages and debts. However,
many are now changing the cycle: buy a first house, build some
equity from paying down the mortgage for a few years, and then
refinance due to an increase in property value. Even worse, some
are using a home as collateral to take on more consumer credit,
which often have higher interest rates. This troubling pattern is
what keeps the economists up at night.
So, what can Canadian householders do to ensure that they do not
fall into the "vulnerable" category?
It is most important that Canadian households maintain the
ability to meet their monthly debt obligations. If a family is
devoting too much of their budget to credit cards, bills, and
mortgage payments, they are more susceptible to interest rate
fluctuations. Even a slight rise in rates could mean the inability
to service their debt.
 The ratio of
debt payments, including principal and interest, relative to
Graeme has been a member of
the Crowe Soberman Inc. insolvency team for six years. He works
with clients in corporate recovery and turnaround, receiverships,
corporate and consumer proposals, and personal insolvency.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Canadian bankruptcy regime was designed with two key purposes in mind – provide options to ‘honest but unfortunate' debtors struggling with an unmanageable financial load and create an orderly means for creditors to recover amounts owed them.
The Court of Queen's Bench of Alberta authorized a disposition of a debtor's assets by a receiver immediately upon appointment and without being forced to conduct a marketing process within the receivership proceedings.
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