What Are The Top 10 Causes of Bankruptcy in Canada?
Credit card over usage is a major cause of debt
People who are considering filing bankruptcy are not alone. Over 120,000 Canadians declare bankruptcy or make a consumer proposal (a popular bankruptcy alternative) annually. These consumers are honest people who found themselves trapped in debt for one reason or another causes of bankruptcy.
Credit card over usage is one of the many causes of bankruptcy.
Understanding some of the major causes of bankruptcy in Canada might help you identify causes of financial problems early so you can take control of your debt before it becomes overwhelming. In some cases, the cause of declaring bankruptcy is a disaster and unavoidable. In other cases, you can spot the financial problem early and make the necessary changes to avoid bankruptcy.
The Top 10 Causes of Bankruptcy in Canada are:
1. Causes of Bankruptcy – Overextension of Credit
Overextension of credit and over-spending is the leading cause of bankruptcy in Canada. Having access to too much credit, easy ways to shop online, and poor financial habits due to poor financial literacy skills can easily lead to too much debt. Often this problem of too much debt is combined with another financial problem – such as a divorce, job loss or gambling addiction – to lead to bankruptcy. Learning how to live by a reasonable budget is an effective way to manage your finances and keep your use of credit under control.
Having income that fluctuates throughout the year can make it challenging to save money and stick to a budget. If a financial disaster occurs during your offseason and your income is very low, or even non-existent, you might be forced to rely on credit to make ends meet. Without an adequate savings account and planning to manage funds throughout the year season employment can lead to bankruptcy. In fact, seasonal employment is one of the top causes of Canadian bankruptcy filings.
3. Causes of Bankruptcy – Job Loss / Income Reduction
Many Canadians are only $200 a month away from a serious financial disaster so a consumer losing their job can quickly find themselves without any remaining savings and having to pay their monthly living expenses on credit. Staying on top of your monthly payments can be impossible without a steady source of income.
Even if you have not lost your job, you might have been given fewer hours or had your overtime canceled. Even with a steady income, if that income is seriously reduced you can find it impossible to stay on top of your expenses. In order to prepare for a job loss you can build an emergency savings fund, but if you cannot find a new job with the same salary quickly even an emergency savings fund can be drained quickly.
4. Causes of Bankruptcy – Relationship Breakdown / Divorce
A divorce or a relationship breakdown can be emotionally and financially taxing. In addition to the legal costs of divorcing, former spouses will now find themselves paying for two households on the same income as before. With legal fees, living expenses on a reduced income, and child and spousal support payments to be made, your finances can rapidly spiral out of control. Divorce is a leading cause of bankruptcy in Canada.
5. Causes of Bankruptcy – Money Mismanagement
Mismanaging finances is a leading cause of financial problems in Canada due to a lack of financial literacy. Not understanding how to budget and save for a rainy day can lead to credit and debt problems. Without taking control of these problems early you can quickly find yourself in a situation where declaring bankruptcy is a real possibility.
6. Causes of Bankruptcy – Illness or Medical Problems
While Canada has government healthcare, not all medical costs are covered. Being forced to take time off work to recover from an injury or a sickness can quickly drain your savings and force you to pay for living expenses and recovery costs with credit cards. People that are seriously injured might be unable to return to work and even with disability benefits, these payments might not cover your medical and living expenses. Without adequate savings and insurance, a major medical event in your life can cause you to have to consider declaring bankruptcy or to seek an alternative such as a consumer proposal.
7. Causes of Bankruptcy – Failed Business
Starting a business is challenging and sometimes a new business venture simply does not work out as planned. A business failure can be very expensive and depending on the type of business, the director might be personally responsible for the business debt. In this case, the debtor will have to file for personal bankruptcy. Before you start a business do your research and ensure that you are adequately prepared for any business disaster.
8. Causes of Bankruptcy – Gambling Addiction
Problem gambling can lead to severe financial problems. Borrowing to pay gambling debts and to keep gambling will rapidly spiral out of a person’s control. A person considering bankruptcy for their gambling debts needs to be aware of certain things. Firstly, a problem gambler needs to take real steps towards dealing with their gambling addiction. Filing bankruptcy without dealing with the root cause of your problem gambling, will not solve the real issue and you will find yourself in debt once again.
Additionally, according to Section 173 of the Bankruptcy and Insolvency Act a problem gambler might not receive their absolute discharge from bankruptcy:
“Section 173 (1e) (e) the bankrupt has brought on, or contributed to, the bankruptcy by rash and hazardous speculations, by unjustifiable extravagance in living, by gambling or by culpable neglect of the bankrupt’s business affairs;”
Generally, if your bankruptcy is caused by gambling debt the bankruptcy court will grant a conditional discharge. A conditional discharge comes with a conditional order from the court often requiring the bankrupt to pay a portion of their debts incurred through gambling in order to get a full bankruptcy discharge.
While not paying taxes causes relatively few personal bankruptcy filings in Canada, not paying your income taxes can be a sign of a serious underlying financial problem. If you have not paid your taxes you should speak with a financial expert such as a Licensed Insolvency Trustee to determine if you need assistance with managing your finances.
10. Unexpected Disaster
Many people believe that those that declare bankruptcy are irresponsible people who always mismanage their money. In reality, many debtors are forced into a situation where bankruptcy becomes unavoidable due to a major disaster. The cause of bankruptcy for many consumers is something out of their control such as a major repair on a home that was not planned for, a major accident or a death in the family. Dealing with an unexpected disaster can be very expensive and without the adequate savings, the expenses can quickly overwhelm an individual.
Working With a Licensed Insolvency Trustee in Canada
Regardless of the causes of your financial problem that is leading you to consider bankruptcy, there is a solution. Contact a Licensed Insolvency Trustee who can help you find the right solution regardless of the causes of your financial trouble. We can help you understand your situation and work out a plan to help you live debt free!