Mario ToneguzziRising interest rates combined with near record high consumer debt levels are expected to increase the number of Canadian consumers who will be forced into insolvency over the next year, warns the Canadian Association of Insolvency and Restructuring Professionals (CAIRP).

The association says historically there has been about a two-year lag between the time interest rates begin to rise and when consumer insolvency filings start to increase.

“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. 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,” said Chantal Gingras, Chair of CAIRP, the country’s national association of insolvency and restructuring professionals which represents nearly 1,500 trustees and associates across the country.

The association said that rising interest rates between 1996 to 2000 sparked a 22 per cent hike in the number of annual consumer insolvency filings from 1998 to 2003. Also, interest rates increases from 2004 to 2006 contributed to a 54 per cent increase 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. However, with interest rates trending upward since 2017, CAIRP expects to see a corresponding trend for insolvency filings heading into 2019,” it said.

The association also warns that rising rates will lead to less consumer spending and impact Canada’s economy and business growth. That could lead to a higher unemployment rate which would further impact consumer insolvency filings.

“While none of these factors cause bankruptcies on their own, together they are the perfect storm,” said Gingras.

A recent survey of the association’s members found that over 70 per cent of them believe consumer insolvency filings will rise over the next five years and 97 per cent believe they will increase or stay the same over the next year.

Also, 95 per cent believe Canadians possess unhealthy levels of debt.

“A person who is unable to meet their financial commitments does not automatically go bankrupt; in an environment where credit is easily accessible, they simply borrow more. Those who don’t have strong personal finance skills are more easily lured into increasing lines of credit, taking on high-cost payday loans or credit cards. Credit can be a benefit to consumers when used wisely, but for those without financial savvy, it can quickly become an inescapable cycle of debt,” added Gingras.

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