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The Canadian Association of Insolvency and Restructuring Professionals (CAIRP) has issued dire warning: as interest rates move higher, the number of Canadian consumers who will be forced into insolvency will also rise starting in 2019.
Low rates and access to credit have allowed some borrowers to keep up with their debt repayments that otherwise would have been unmanageable.
After analyzing more than 20 years of consumer insolvency statistics from the Office of the Superintendent of Bankruptcy (OSB), CAIRP found there was a two-year lag between the time interest rates began to rise and when consumer insolvency filings start to increase.
For example, raising interest rates during the periods of 1996 to 2000 helped fuel a 22 per cent increase in the number of annual consumer insolvency filings from 1998 to 2003. Interest rate increases from 2004 to 2006 fuelled a 54 per cent jump in the number of annual consumer insolvency filings between 2006 and 2009. With relatively stable interest rates from 2010 through to 2016, annual consumer insolvency rates in Canada have been fairly consistent since 2012.
“For more than a year, the issue of high consumer debt and rising interest rates have been a growing concern but they haven’t been reflected yet in the number of consumer insolvency filings,” Chantal Gingras, the chair of CAIRP said in a statement.
“That is partially due to the insolvency time lag that occurs between the point trouble begins and the point at which overextended individuals are forced to begin the debt resolution process.”
Before you panic, just because you may be unable to meet your financial obligations right now doesn’t mean you will automatically go bankrupt.
In an environment where they can, some will simply borrow more. But before you explore this option, reach out and get some help. A proposal could include striking a deal with creditors through an informal debt settlement, consolidation of debt or if all else fails, or possibly declaring bankruptcy. The point is there are options to explore.
Keep in mind that as interest rates head higher, the knock-on effect will be a cooling in consumer spending. Growth will slow and that could potentially lead to an increase in unemployment, which in turn leads to an acceleration of consumer insolvency filings. In isolation, Canadians could probably cope, but it is the combination that leads to a perfect storm for those just barely staying afloat.
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