What causes bankruptcy?

There are several factors which can lead to bankruptcy. Studies show that many Canadians still perceive bankruptcy as being the fault of the besieged debtor. But statistical reality shows another story. Consumer debt has been rising steadily for the past three decades. In a recent four year period (2003 – 2007), personal debt for the average Canadian rose by an astonishing 27%.

Negative attitudes towards bankruptcy haven’t changed in the past three decades; it is the attitude towards credit that has altered dramatically. A couple of decades ago, buying anything on credit was considered a sign of financial unmanageability. It was almost unheard of to use credit cards to buy groceries. There was no such thing as a cash advance on a credit card. And the limit on people’s credit cards was much smaller than today, where someone with a minimum wage job can easily owe twice their annual salary in consumer debt. In the past 30 years, household debt has increased annually by 4.7 percent.

At the same time as individual debt loads have gone up, personal savings are at an all time low. Many people are just one paycheck away from seeing their finances in disaster, as most people do not have enough liquid savings to get through more than a month without wages. This vulnerability means that an illness resulting in a decline in income, losing a job, having a baby, going through a divorce, or a rise in the interest rates can bring down the financial house of cards that so many Canadian families live in today.

Because our negative attitudes towards credit are largely gone (a lot of advertising dollars have been spent on this goal), most credit card users have a perceptual gap between the impulse purchase and the fact that it must be paid back and that interest will increase the purchase price of the item. It is very hard to manage money in a realistic way when this reality gap exists (see After Bankruptcy: The 3 Steps to Financial Fitness for practical tips on money management).

If you are reading this because debt is making your life stressful, a consultation with a bankruptcy trustee can point you towards a solution and a fresh financial start. 

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