Each year, over 120,000 people file for bankruptcy in Canada, and this number is expected to climb in 2019.
With the high cost of living in most cities across the country, a staggering number of Canadians are struggling to get by between paychecks, and they have little to no savings. So, any disruption in finances can be detrimental to their financial health.
It’s a common misconception that people who file for bankruptcy or a consumer proposal have simply been lazy and out of control with their money. In fact, there are a variety of factors which may lead to someone filing for bankruptcy.
Many businesses are suffering these days and as a result job security isn’t guaranteed anymore. Fewer companies are offering overtime opportunities, and many have even cut yearly bonuses.
While employment insurance is usually an option after a job loss, it is often significantly less than your income, and it can take a few months to receive it. If there’s no savings to be used in the meantime, this could cause serious financial hardship.
Divorce or separation
In Canada, approximately 38% of all marriages end in divorce. And it’s not just divorce which can create financial strain. The loss of a significant other, or even a roommate, can throw off your finances.
Now you must pay your own bills, instead of sharing the cost with others. And your income has very likely stayed the same.
Not to mention, all the legal fees that go along with divorce add up fast. And it’s possible spousal and child support payments may need to be factored in after separation.
We are extremely fortunate to live in Canada where most of our medical costs are covered. However, medical issues can come with costs for prescription medications and other healthcare needs which often aren’t covered.
Adding even more financial hardship to the issue is the fact that most people are unable to work for long periods of time while dealing with medical issues. This can result in less—or even no—pay.
You never know when you could suddenly be handed a hefty bill for something important. Your car could suddenly require major repairs, your dog may get sick, resulting in high vet bills, or your roof could start leaking, leaving you to shell out big money for a new one.
Also, if you, or anyone in your family, requires dental work, those costs can add up very quickly.
Often, several of these unexpected expenses occur in a short period of time. If you have little to no savings, or you’re truly living paycheck to paycheck, these expenses can suddenly push you into a lot of debt.
Not paying enough taxes
You may file your taxes every year, but you may have made an honest mistake and deemed some income unimportant to report to the CRA. Or, maybe you’re self-employed and forget to remit something you should have. Sooner or later the CRA—or you—will realize your mistake and you’ll be on the hook for a larger tax bill.
The CRA has the means to garnish wages and freeze accounts, which can then turn into a major financial burden for some.
Starting a business
Even businesses which ultimately end up very successful tend to go through several years of loss before they start showing a profit. While most people expect this, and hopefully have some financial support in place, it’s hard to know how long of a loss period you will go through. And, you may start accruing hefty debt in the meantime. Should your business not make that turn into profit, and ultimately ends up failing, this can be a very hard situation to recover from financially.
Poor money management skills
Unfortunately, most Canadian schools still don’t do a great job of preparing students for money management once they are working and have access to credit.
Gaining access to credit cards for the first time can be overwhelming and cause people to spend a lot more than they would have without one. University graduates often start off their work life with not only heavy student loans, but with credit card debt, and maybe even a car loan.
Poor money management skills can then follow you through life. You may find yourself unable to get ahead of these financial issues and continue to accumulate debt on top of debt until it gets out of hand.
Sometimes falling into debt isn’t as clear cut as just not following a budget or running into unexpected expenses. Purchases made because of addiction—to anything from drugs or alcohol to shopping or gambling—can quickly spiral out of control.
Paying for addictions can add up fast. Also, the psychological nature makes this spending extremely hard to gain control of, which can lead to a hole of debt which is very hard to crawl out of.
Taking on too much debt
Maybe your credit score was healthy, and you have a well-paying job, so you decided to apply for a mortgage to buy a bigger house than you really needed. Then you bought a brand-new car because you were given a low finance rate. You may have even taken out a personal loan to fix up your new home or take that trip you always wanted to.
Having so many monthly payments can be hard to manage month after month. Missing even a few will likely not only push you further into debt, making it hard to catch up, but it will damage your overall credit score.
As you can see, there are many factors beyond one’s control which may lead to bankruptcy. But, managing the debt you currently have, and making smarter financial decisions, can greatly prevent having to file for bankruptcy.