What Triggers Insolvency?Understanding Debt

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Table of ContentsIntro to Causes of Debt

Trigger #1: Debt-Stress-Debt Cycle

Trigger #2: Job Related Bankruptcy

Trigger #3: Divorce and Bankruptcy

Trigger #4: Illness, Injury and Stress

The Solution

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Canadians are deeper in debt than ever before. The ratio of Canadian household debt to disposable income rose to a record 165.0%2 in the fourth quarter of 2012.

The end result of high household debt levels is that more than 100,000 Canadians file bankruptcy in Canada each year.

2. Statistics Canada: Credit market debt to disposable income (Table 378‐012)

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Insolvency in Canada

Reported Causes of Debt

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Financial mismanagement Unexpected events

37%

63%

Only 37% of insolvent debtors report over-extension of credit or poor financial decisions as the sole reason for their bankruptcy.

2 out of 3 bankruptcies are caused by unexpected events, including:• Job loss• Martial or relationship

breakdown• Illness, injury, and health

problems

Trigger #1: The Debt-Stress-Debt Cycle

When the Inability to repay debt equals more debt

As the pressure of meeting monthly debt payments begins to build, insolvent debtors often turn to more credit.

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Trigger #1: The Debt-Stress-Debt Cycle

As the pressure of meeting monthly debt payments begins to build, insolvent debtors often turn to more credit.

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When the Inability to repay debt equals more debt

Filing bankruptcy becomes the only solution.

They may use credit cards to pay for daily living expenses and rely on payday loans to make ends meet until the next paycheque arrives.

For many, this leads to a debt-stress-debt cycle that adds to their already difficult financial situation.

While 81% of bankrupt debtors were working at the time of their insolvency, many experienced periods of job loss or income reduction prior to filing.

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Trigger #2: Job Related Bankruptcy

When a household breadwinner experiences a reduction in income, the temporary solution may be to turn to credit to pay for daily expenses such as food or utilities.

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Trigger #2: Job Related Bankruptcy

More than 1 in 3 bankrupt debtors indicate that job related issues contributed to their financial difficulties.

Unfortunately, the financial impact of job loss can be felt for many years.

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Trigger #2: Job Related Bankruptcy

Financial problems and stress over money are one of the top reasons couples divorce.

Bankruptcy generally does not cause divorce, but rather, it can be the financial outcome of divorce.

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Trigger #3: Divorce and Bankruptcy

Two incomes are better than one

Financial difficulties are often compounded when a couple separates, because now, ex-spouses are faced with managing on one income rather than two.

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Trigger #3: Divorce and Bankruptcy

Recently separated people often rely on credit to pay their bills.

The debt-divorce-debt cycle

The new adjustment to single-income status, combined with any potential legal costs associated with a marital breakdown can cause debts to grow even larger, and eventually lead to bankruptcy.

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Trigger #3: Divorce and Bankruptcy

Income loss due to time off work for an illness, accident or other medical reason can make it difficult to pay bills.

Additional medical costs can add to already mounting debts.

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Trigger #4: Illness, Injury and Stress

During their recovery, some may use credit to pay for daily expenses.

Debts can become the cause of stress and depression related illnesses, which can lead to time off work and more debt.

To cope, debtors may find themselves spending more than they should, increasing their use of credit.

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Trigger #4: Illness, Injury and Stress

Which comes first: stress or debt?

Once illness-related debts become out of control, a proposal or bankruptcy is often the result.

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Trigger #4: Illness, Injury and Stress

Worrying about money and debts has a devastating effect on individuals and families.

Recognizing the need for help and talking to a reputable professional, such as a trustee in bankruptcy, like Hoyes Michalos for advice is the first step in eliminating overwhelming debt problems.

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The Solution to problem debt!

There is hope. You can be debt

free. Download our Fresh Start

eBook