Understanding Your Debt -- Are You Safe from Bankruptcy in Canada?

Posted by: Krista McDonald on 12/30/2010

Do you know what your debt to income ratio is?  Do you know how much of your monthly debt repayment goes towards unsecured debt and how much towards secured debt?  If you can handle the payments right now, why should you care?  You’re safe from a bankruptcy in Canada, right?  Let’s talk about that.

First, your debt to income ratio is the percentage of your monthly gross income that goes towards all your monthly debt repayments.  You may already know high debt-to-income ratios can prevent you from getting a home mortgage or drive you into a higher rate.  If you do not know your ratio, get on the net, find a debt-to-income calculator, and see where you are right now.

Many Canadians are literally living from paycheque to paycheque, spending everything they make and in some cases more than they make.  How can you spend more than you make?  Charge it!  The national pastime.  If you are meeting your debt obligations right now with little room to spare, you may be standing on the edge of financial disaster.  Here’s why:

Although Canada did better than many other industrialized nations in weathering the Great Recession of 2007, we still have an unhealthy unemployment rate and stagnant growth in personal disposable income.   What’s more, in 2009, total Canadian household debt reached all time highs.  Our debt-to-income ratio as a nation of consumers was 141%.   In short, we are not earning more but we are borrowing more.  Some might argue the lack of growth in real income is forcing Canadians to take on more debt to support their lifestyles.

We do not want you to get bogged down in a bunch of statistics; but you need to know the implications of carrying a debt load you can just barely handle right now.  You probably know interest rates are currently at historic lows, which actually makes borrowing right now seem especially beneficial.

You do not have to be an economist or a financial analyst to predict that interest rates will rise at some point in the future.  Maybe it will take one year or five years or maybe a little longer.  How much they go up is guesswork but if you are living right at the edge, it will not take much of a rise to push you over.

To stay solvent you need to worry not only about the total debt you are carrying, but also about the cost of carrying that debt.  When interest rates rise, your mortgage payments will go up when your loan comes up for renewal.  Your credit card interest will go up and so will your minimum monthly payments.  Will you be able to handle that?

The sky is not falling and the world as you know it is not coming to an end.  But if you want to protect yourself from the possibility of a Canada bankruptcy as a means of dealing with your debt load once it reaches the point you can no longer handle it, there is no time like the present to begin setting debt goals that will let you begin stepping away from the edge.