According to the Government of Canada, Canadian insolvency rates (with data from 2018) are currently at 4.3%. Of all the insolvencies, 1.9% are bankruptcies and 2.4% are consumer proposals. Insolvency rates are influenced by personal factors like job loss, divorce, money mismanagement, illness. It is also affected by economic factors like mass layoffs, price inflation, and growing interest rates. Understanding how insolvency is affected and what it means regarding your provincial economy can help you make better financial decisions in the future.
First, let’s look at what these insolvency rates mean for each province, then we’ll dive into how economic factors affect insolvency rates.
Before we look at the rates, lets first look at what it means to be insolvent. Insolvency is a financial condition in which a person’s assets are unable to cover the debts they have. People typically become insolvent when they don’t have the financial know-how to manage money or control spending. It can also be caused by job loss, an increase in financial responsibility, inflation in prices, and other unexpected personal and economic factors. When a person becomes insolvent, there are two things they may consider to manage their debts: bankruptcy or a consumer proposal.
The insolvency rates vary between province to province, each reflecting its own economic health. Newfoundland and Labrador, Prince Edward Island, Nova Scotia, New Brunswick and Quebec have the highest rates of insolvency in Canada. In particular, New Brunswick and Nova Scotia rank at the top with 7.4% and 7.3% respectively. On the other hand, Nunavut, the Northwest Territories, and British Columbia have the lowest insolvency rates.
Understanding the economic factors that affect your province’s insolvency rates can help you plan your future financial decisions with more caution in relation to those economic factors. For example, Newfoundland and Labrador have seen an increase in insolvency rates since 2014 when oil prices had plunged causing economic turmoil (specifically in oil-reliant provinces like Newfoundland and Labrador, Alberta and Saskatchewan). This drop had lingering effects as insolvency rates kept climbing well after 2014 in these provinces.
By understanding these economic factors you can be better prepared for any economic uncertainty. For example, unemployment tends to increase during economic struggles, which leads to an increase in the number of individuals who need access to credit. Credit product usage grows but, because of unemployment, consumers are unable to pay. This can cause banks and lenders to inflate rates making it harder to be approved for future credit. If you notice insolvency rates spike in your province, it’d be wise to lock in a mortgage rate, find a second source of income, or start saving more so you don’t have to rely on credit during your provincial economy’s slump.
So, what does it mean to declare bankruptcy? Bankruptcy is a debt relief option for people who are backed against a wall. It is considered as a last resort solution to manage your debt problems as it will affect your credit for up to 7 years after you’re discharged. Bankruptcy is a formal proceeding where you work with a Licensed Insolvency Trustee (LIT) to get your debts dismissed. When you file for bankruptcy most of your debt will be absolved except for certain debts like student loans, child support payments, fines ordered by the court and debts from fraud. Moreover, your assets may be seized to help pay off some of the debt you owe.
However, in the end, though you may incur some loss, you will be free from debt and be able to start anew. If you’re thinking about declaring bankruptcy, be sure to speak with a credit counsellor first. They can help you explore other debt-relief options like a debt management program or a consumer proposal, which have less severe consequences on your credit score.
Looking at the data, bankruptcy rates are lowest in Nunavut, Northwest Territories, and British Columbia. In fact, Nunavut had no bankruptcies in the year 2018. On the other hand, the five provinces that had the highest insolvency rates (Newfoundland and Labrador, Prince Edward Island, Nova Scotia, New Brunswick, and Quebec), also ranked as the provinces with the highest bankruptcies rates.
A consumer proposal is a legal proceeding that is filed by a Licensed Insolvency Trustee (LIT). The LIT works to create a payment plan that will allow you to pay off a portion of your debt over a period of five years. A consumer proposal is a preferred way of managing insolvency as it allows you to keep your assets and get rid of your debt in an affordable manner. Moreover, filing a consumer proposal only affects your credit score for 3 years after completion.
Looking at the graph above, we can see that the consumer proposal rates are higher in every province except Nova Scotia, Prince Edward Island, and Quebec. A closer look shows us that the five provinces that had high insolvency rates (Newfoundland and Labrador, Prince Edward Island, Nova Scotia, New Brunswick, and Quebec) were also the ones who had lower consumer proposal rates or rates that were close to equal to bankruptcy rates.
When looking at the ratio of consumer proposals to the insolvency rates, consumer proposals were most popular with Nunavut, Alberta, Saskatchewan, Northwest Territories, and Ontario. Of the insolvencies recorded, 100% of those insolvencies were consumer proposals in Nunavut, 66% in Alberta, 64% in the Northwest Territories, 63% in Saskatchewan, and 62% in Ontario. Nova Scotia was the province with the lowest consumer proposals rates (37%).
Insolvency rates are a good indicator of economic health, but the Canadian insolvency rate is not a direct reflection of each individual province. As seen above, the national rate for consumer proposals was 2.4% and 1.9% for bankruptcies but not all provinces had a higher consumer proposal rate. In fact, almost half of the provinces had a higher bankruptcy rate or about even rates between the two. All this to say, understanding your individual province’s insolvency rate can help you understand its economic health and hopefully lead you to make better financial decisions.
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Priyanka Correia is a Marketing Coordinator and personal finance expert at Loans Canada. Priyanka completed her Bachelor's degree in Marketing at Concordia University and has published work that has been mentioned in various news media. She is passionate about money management and educating Canadian consumers about how to take control of their financial lives.
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