Financial advisors take heed: consumer insolvencies are trending upward, and our country is now on track to see 102,200 Canadians sink under the weight of their own debt in 2005.

At the end of the nine months ended Sept. 30, consumer insolvencies were up 1.4% over the same period a year ago, states a quarterly bulletin from the Office of the Superintendent of Bankruptcy. Between April 1 and June 30, the quarterly growth rate jumped 5%, compared with the same period last year. In the latest quarter, July 1 to Sept. 30, insolvencies were up 2.2% over the same period in 2004.

Equally noteworthy, the number of consumer proposals for insolvency has spiked sharply upward, rising 6.1% over last year’s number.

Part of the problem is the savings rate. It’s negative. As of Sept. 30, Canadians were spending $1.18 for every dollar they earned and consumer credit growth was running at 12.3%.

Certainly, rising interest rates and heavy consumer debt are taking their toll. But it is not equal across the country. Canada is splitting into two distinct groups. There are the booming economies of British Columbia and Alberta, in which consumer insolvencies are declining. Then there is the rest of the country, where consumer insolvencies are either flat or rising — in some cases noticeably so.

The good news is business insolvencies are in decline, dropping 6.1% across the country. However, there is one notable exception: Canada’s industrial heartland, Ontario, has seen a troubling 8.7% increase in business insolvencies from with the same period last year. In contrast, Quebec, Alberta and B.C. are experiencing declines of more than 10%.

Insolvency takes two forms: a proposal and an actual bankruptcy. A proposal is when debtors work out a deal with their creditors and pay the debt they owe according to an agreement. They keep their assets and if they meet their obligations, the debts are discharged with the final payment.

That contrasts to bankruptcy, in which a debtor’s assets are seized and sold to pay creditors, and the bankruptcy is then discharged.

Atlantic Canadian consumers are suffering the most, with insolvencies up 11.6% over the same period last year. Insolvencies are flat in Quebec at 0.3%, while in Ontario, Saskatchewan and Manitoba they are up between 3% and 4%. However, consumer insolvencies are down 10.5% in Alberta year over year and down 0.8% in B.C.

What do the experts think? Phil Clarke, a chartered accountant and bankruptcy trustee at KPMG in Halifax, pegs the rise to easy access to credit. No-downpayment deals, in which consumers can get goods and not pay for a year, are partly to blame because interest kicks in at a very high rate. “There’s a lack of awareness or understanding of these credit products,” he says.

Atlantic Canada, which has high seasonal employment, “hasn’t been benefiting from the increasing employment the country has seen. Atlantic Canada has actually been losing jobs,” Clarke says.

Atlantic Canada

The unemployment rate in Atlantic Canada sits above 10%, compared with the national rate of less than 7%. “A high unemployment rate would drive that rate of consumer insolvency,” he says.

The region’s main industries — fishing, tourism and forestry — are all suffering. Fishing is experiencing the effects of low prices and dwindling fish stocks, while tourism is being hit by a rising Canadian dollar. The pulp and paper industry is experiencing the effects of the softwood lumber dispute and low paper prices.

A number of events are also conspiring to drive up insolvencies in Ontario, says Stanley Kershman, an Ottawa bankruptcy lawyer and author of Put Your Debt On A Diet (www.debtonadiet.com). He cites everything from rising interest rates to increasing energy costs and property taxes, and says he expects to see more insolvencies in the future.

In terms of energy costs, he notes, “Electricity bills are really high right now. Consumers are paying between $50 and $80 a month [more than in the past]. It creeps up on them and we’re starting to see it in fuel for vehicles.”

Interest rate increases are also making debt servicing far more expensive, Kershman says, warning that rates will continue to rise. He predicts rates will increase between 1.5 and two percentage points in the next two years, which will add hundreds of dollars a month to home carrying costs.

@page_break@Increasing property taxes are also adding to the debtload. “Consumers didn’t fathom that property taxes were going to rise the way they have,” he says.

Kershman adds that, although businesses have been able to “stay above water,” he expects the treading will become more difficult. “I think those stats may change in the future,” he says.

A rising C$, climbing interest rates and energy prices will combine to hurt the bottom line as businesses look to pass on rising costs to consumers, who are already weighed down by debt and increasing expenses, and can ill afford to pay more. They will have to cut back somewhere.

As for Western Canada, Guy Levy, a bankruptcy lawyer at Meyers Norris Penny LLP in Calgary, says it’s no surprise that insolvencies are down because the region’s unemployment rate is low. “So there [are] lots of people who have jobs and, to that extent, they can cope with their own debts.”

Nonetheless, 9,300 Albertans recently sought protection from creditors, a number which he finds high. “I thought the stats would be down more than that,” he says. He speculates that some of these people have moved to Alberta seeking work and were carrying large debt loads. “They didn’t find the employment they were expecting,” he says. “Their incomes are insufficient to deal with the debt. You see bankruptcies arising as a result.”

What should advisors do? Kershman recommends telling your clients to get defensive by cutting their costs and spending less.

And the best way to start is by moving from a variable- to a fixed-rate mortgage.

“Rates are not going to go any lower,” he says. “The only place they can go is up.” IE