Five common causes of Bankruptcy

Like all professions, there are several questions Licensed Insolvency Trustees hear quite regularly. By far the most common is “What is the typical cause of Bankruptcy or insolvency?”

My usual response is there isn’t a typical cause — or a typical person for that matter ­— who has to file a Bankruptcy or Consumer Proposal to deal with overwhelming debt. Every situation is unique, and people may run into any number of issues that can impact either their monthly income or expenses.

A typical day involves meeting with ordinary people who have been unfortunate to run into financial problems for various reasons. Often, these include job loss, breakup or separations, illness (either their own or a family member), lack of employment, or a simple failure to budget.

These are challenges we can all run into at various points in our lives. For some people, it’s just a matter of bad timing or several of these challenges converging at once.

Job loss

Job losses can happen unexpectedly — often through no fault of the individual (e.g., layoffs due to a recession or downsizing due to corporate restructuring) — and have a devastating effect on a person’s budget. Bills and debt obligations that may have been manageable when they were employed are suddenly burdensome, even after cutting back on non-essential spending.

The largest expenses in a person’s life are often the most difficult to put off to the next month and the most likely to be funded through debt, such as a mortgage or car payment. The consequences of missed payments, like a repossession or foreclosure can be swift and have long lasting effects.

Breakups, separations, and divorce    

Combining financial lives is easy. Dividing them can be a drawn out and costly process. For one, living costs are simply not proportionate to the size of a dwelling in most Canadian cities. A one-bedroom apartment may be only a few hundred dollars per month cheaper than the two- or three-bedroom dwelling the couple shared the cost of. People often report falling behind on payments as they make their way with a significantly lower household income.

Other problems arise when joint debts or shared assets are involved. There may be disagreement on who’s responsible for certain bills or issues around one partner overspending and leaving the other to pick up the tab. And there are also potential legal, real estate, and other costs which may be required to formally dissolve the relationship — these can often grow into the thousands of dollars.

Illness

When a family has a major illness that is not covered by sufficient insurance this can cause additional expenses for a household. Time off work to attend medical appointments, travel to specialists out of town, prescription drugs and specialized equipment, and even nursing home or hospice care can all be a major financial drain.

The situation can easily be even worse if it’s the primary breadwinner who experiences the Illness and they’re unable to work and support the family.

Un- or underemployment

Post-secondary education can be a fantastic way to improve a person’s future earning potential — but it can also result in a lot of student loan debt. While most student loans are payable shortly after the recipient graduates, there’s no guarantee their employment or earnings prospects will match this new financial burden. Competition for entry level positions is fierce. Certain academic majors simply aren’t in high demand.

Early adulthood also goes in hand with several other new financial responsibilities which can quickly become overwhelming and — in combination with student loan repayments — trap consumers in a cycle of debt. Although there is some assistance with government loans, it’s not uncommon for people to struggle for years trying to repay debts and build a life due to a lack of or underemployment.

Overspending and failing to budget

Some insolvencies simply result from people living beyond their means. Perhaps this shouldn’t come as a surprise given the lack of overall financial education in the public school system, the ease of credit access in Canada, the volume of advertising in our day to day lives, and the pressure to measure up to friends and neighbours. 

This is what comes to most people’s minds when they think about Bankruptcy — and it’s often treated as a moral issue, but it shouldn’t be. Debt can sneak up on the best of us, especially if we don’t have a regular process to track our income and spending. That’s why budgeting is so important, it forces consumers to prioritize and manage their resources effectively.

Some people who fall into this category also struggle with addiction issues such as compulsive drinking, gambling, drug use or shopping. These often reflect other life difficulties such as trauma or mental health challenges. Often their insolvency process will be part of a larger recovery effort such as working with a mental health professional and/or taking part in a 12-step program.

Bankruptcy offers more than financial relief

Most people think of Bankruptcy as an opportunity to erase unmanageable debts and get a financial fresh start. This is true, but one of the most transformational parts of the Bankruptcy or Consumer Proposal process is the requirement to attend two insolvency counselling sessions. These discussions can help consumers understand the underlying reasons behind their insolvency and equip them with the budgeting and financial literacy skills to avoid similar challenges in the future. These sessions are usually one on one with an insolvency counsellor.

It can be challenging to speak to a stranger about your debts, but almost everyone we work with is happy they reached out and plan in place to deal with their debts — and most wish they’d done so sooner. If debt is preventing you from living your life, stop suffering in silence. Contact MNP for a Free Confidential Consultation and learn your options today.