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The ins and outs of debt

September 5, 2017

Debt is a way of life in Canada that is very misunderstood.

Getting into debt is very easy – debt in Canada takes all sorts of shapes and forms – from Bank Issued Credit Cards with interest at 19% and terms that allow you 375 years of minimum monthly payments to Finance Company and Pay Day Loans at 59% interest.  The highest interest rate that can be charged in Canada is 60% under the Interest Act.  All it takes to get into debt is a heartbeat, ID and a pen.  Debt, in some form, is readily available for almost anyone.

Getting out of debt can be a little more challenging – requiring the assistance of a Licensed Insolvency Trustee with typically about 7-10 years of post-secondary education, a law book (the Bankruptcy & Insolvency Act) consisting of 1927 pages, backed up by a Federal Government regulator (the Office of the Superintendent of Bankruptcy “OSB”) and the Court system (Bankruptcy Division).

The cost of debt to Canadians is staggering.  The reasons for so much debt relate mostly to survival – surely no one would ever go into debt to buy anything if they had sufficient money available to simply make the purchase.  Having worked in Insolvency since 1995 and having met thousands of consumer debtors it would be hard for me to recall anyone who deliberately worked the system to avoid paying his or her bills.  Even “high-end” insolvents, such as doctors and dentists, who make very large amounts of money, can become, in a sense, victims of debt.

Most Canadian insolvents (people who are broke and have too much debt) are working people with incomes above the 50th percentile (but below the 98th) – in other words people earning more than $27,600 but less than six figures.  The main two reasons people incur debt is a lack of funds and easy access to “credit” coupled with a lack of understanding of the consequences of being in debt.

Even after completing a bankruptcy people seem to rush to get back into debt – likely not because they intend to rip off creditors or misuse or abuse the system but rather because they want to enjoy the fruits of living in a very expensive society that has costs exceeding their incomes. 

Who then is to blame for our debt crisis?  In my view it is predicated on a lack of regulation.  After all 60% interest, compounding year over year is about the same as 19% compounding for six lifetimes – neither should even be legal.  If lenders had more stringent rules and regulations consumers would have access to less debt, we would all be living very diminished lifestyles without debt.