Debt in Canada has once again reached a record high. According to information recently released by Statistics Canada, the ratio of household credit market debt to disposable income rose to 164.6 percent in the second quarter of 2015, up from 163.0 per cent in the first quarter.
This means that the average Canadian owes $1.65 for every dollar of disposable income they have. This debt includes consumer credit debt as well as mortgage and non-mortgage loans.
According to Statistics Canada and other data, this rising debt is primarily due to low interest rates on mortgages. When interest rates are lower, people are able to borrow more money and afford to repay larger amounts. At this point, it appears that most Canadians are generally able to handle these levels of debt at current interest rates. However, a rise in interest rates could make these debt levels significantly more expensive. If interest rates increased, debt repayment costs would increase, possibly to levels that the average Canadian could not afford.
High levels of debt can lead to issues for several other reasons. One potential issue is that those who have high levels of debt may not be equipped to handle sudden emergency situations. If you have a high level of debt, you may not have much if any savings or any emergency fund. Therefore, if you have a sudden expense like a car repair bill, home repair bill or medical expense, you will need to take on more debt in order to handle this expense. This could put you in a position where you will no longer be able to pay your debts as they become due. If you or your spouse were to suffer a job loss, this could be a situation that you are not prepared for and it could put you in financial trouble.
Dealing with High Levels of Debt
The amount of debt that a person can take on responsibly depends on the individual. This makes it difficult for some people to recognize if they have too much debt. However, if you are at a point where you are spending all of your money on living expenses and debt repayment, you are not saving for the future or for emergencies, you could be in a potentially dangerous debt situation.
If a pipe bursts and your basement floods, will you be able to pay for the repairs? If your car breaks down, could you afford to get it fixed? Without savings, you may need to go deeper into debt ( and remember the interest costs associated with this new debt) to handle these emergencies and you could end up unable to handle this higher level of debt.
If you are in a situation where you are unable to pay your bills as they become due, you may wish to speak with a licensed trustee in bankruptcy. A trustee can review your financial situation and provide you with details on the available options. The name may sound scary, but speaking with a trustee does not mean that you will end up filing for bankruptcy. It means that you will be able to have a professional review your situation and provide you with potential solutions. Deciding how you would like to proceed is entirely up to you.
If you find yourself in a situation where you are unable to save any money due to high debt repayment costs, there are a number of options available to you. You may choose to work with a trustee and file a consumer proposal
or a bankruptcy. However, these legal processes may not be the right choices for you. You may instead need to sit down and evaluate your situation and see where you can cut costs.
Many people find that they are able to have money for savings and debt repayment once they look at their spending and take steps to reduce spending where possible. For example, you could decide to reduce your cable package, cut down on eating at restaurants and spend less money on clothing and entertainment. This could reduce your spending enough that you can will be able to repay your debt more quickly and save some money for emergencies. It may allow you to end up in a better financial situation and make it possible for you to handle emergency situations that may come up.