According to TransUnion and Equifax, 70% of bankruptcy filings are made by indebted Canadians with strong credit scores. So instead of the usual warning signs creditors had with consumers falling behind on their payments, creditors are surprised with borrowers going from being in good standings to being subprime. In other words, consumers who were keeping lenders happy by paying the minimum payments on their bills every month suddenly stopped and declared personal bankruptcy.
In the industry the phenomenon is known as surprise bankruptcy and the numbers have been on the rise for at least a decade, according to credit industry officials.
Credit scores are one of the key tools of measurement creditors (including banks and credit card companies) use in determining whether they will extend credit and at what rate to individual consumers.
“Traditionally, someone who goes into bankruptcy, they missed a payment, then two payments, then three payments and then they go bankrupt,” said Tom Higgins, vice president of analytics at TransUnion. “Now, what we are seeing is people who make all the minimum payments [on their credit cards] and then all of a sudden they go bankrupt. It’s harder to predict when someone is going to go bankrupt than in the past just by looking at their credit information.”
Personal finance management is unraveling for consumers partly because of the wider array of credit options — credit cards, leasing companies, private lenders — than ever before, and they’re able to spread out their debts and shuffle them, making a payment here then transferring the loan to a new credit supplier to avoid late penalties.
Another factor is low interest rates which enable borrowers to carry more debt than they could historically at very low cost. Read more about the dangers of managing debt with lower interest rates here.
Lenders have made it easier for consumers to borrow more credit and pay it off over a longer period of time. Essentially borrowers can sustain payment on any given bill for years if they are only paying off a little at a time each month (most of which is interest). Although their credit report may show a regular inflow of payments, the consumer has no reasonable prospect of every paying off their debt.
The consumers who find little left over each month after paying their bills are the ones who sink into debt when life changing events occur like divorce, job loss or illness. Out of desperation many consumers turn to credit counseling, consumer proposals and bankruptcy for help.
The irony about those consumers with strong credit who turn to bankruptcy to resolve their debts is that bankruptcy will destroy credit. It is the worst thing a person can do from a credit rating perspective.
The minute you file for bankruptcy, Equifax Canada is notified and your name is registered in the public records credit file.
The problem with declaring bankruptcy is not just that it stays on your record but after those seven years are up, you emerge with no credit. You have to start rebuilding your entire credit from scratch.
Whether you are tired of getting nowhere with paying your bills or simply do not have enough at the end of the month to live after paying only the minimum, there are alternatives to declaring bankruptcy.
Debt relief can be obtained through a consumer proposal and an informal consumer proposal. It is important to research all solutions for debt relief before ever considering declaring personal bankruptcy.
For more information on what option is best for you, call OCCA Consumer Debt Relief. One of our expert counselors will go over your finances, help you build a reasonable budget and advise on the best way for you to get out of debt..
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