Source: The Canadian Press

Canada’s bankruptcy watchdog is warning consumers about the “harsh realities” of their borrowing habits, adding his voice to a chorus of officials and economists concerned about Canadian debt loads that hover at historic highs.

“It’s important for Canadians to be aware of the risks and possible consequences of taking on a large amount of debt,” James Callon, superintendent of bankruptcy, said in a statement Friday that was attached to a report on October insolvency data.

“Significant events, such as a change in employment or income, a change in family status or a serious illness, can cause a huge drain on finances,” Callon warned.

“The combination of a large amount of debt and the sudden occurrence of a major life event could lead to the harsh realities of insolvency.”

Callon noted that the number of insolvencies — which include both bankruptcies and the less drastic consumer proposal — filed in the 12 months ended October 2010 was 22.5% higher than the pre-recession levels recorded in 2007-2008.

Canadian debt loads have grown to reach an all-time high, spurred in part by the impact of historically low borrowing costs introduced during the financial downturn to stimulate spending.

The Bank of Canada said Canadians now have the highest domestic debt burdens in history. Its latest data show the ratio of household debt to disposable income has reached 148.1% — or $1.48 for every dollar of disposable income, which excludes what must be spent on taxes and other government levies.

Central bank governor Mark Carney has expressed concern about consumer debt and the ability of borrowers to meet their payments once interest rates begin rising again. Most economists expect Carney to resume interest rate hikes in the middle of this year.

Carney is in somewhat of a bind, driven to keep interest rates low to stimulate demand as the global economy remains uncertain, but concerned about consumers taking advantage of those historically low rates to rack up debt.

However, on a brighter note, the number of insolvencies reported in October — though up 0.2% from September — was still down 9.1% from October 2009, when Canada was just beginning to emerge from recession.

Consumer insolvencies decreased by 8.1% compared with October 2009, while business insolvencies have decreased by 31.7%.

The proportion of insolvencies in the form of consumer proposals, which offer creditor protection while a portion of debt is repaid, has increased about 8% compared with the year-earlier period.

The bankruptcy office said that could be a sign that consumers are taking advantage of changes to the Bankruptcy and Insolvency Act enacted in September 2009 that allow consumers more flexibility in filing proposals.

However, Jeffrey Schwartz, executive director at Consolidated Credit Counseling Services of Canada Inc., said statistics indicating that bankruptcy is decreasing doesn’t mean the number of financially burdened Canadians is declining, but that many are finding other ways of managing debt.

“I think the situation does warrant some concern,” he said.

“When the superintendent of bankruptcy gets on the horn and says ‘yes, these consequences are dire,’ he’s just echoing what everyone else is saying, and I can’t disagree with that.”

Jobs data released Friday, a good indicator for future insolvency statistics, showed Canada’s economy ended the year on a stronger footing, creating 22,000 net new jobs in December.

However, the additional jobs were not sufficient to outstrip the increase in the labour force, hence the country’s unemployment rate remained unchanged at 7.6%.

Bankruptcy trustee Doug Hoyes of Hoyes, Michalos and Associates, said while the insolvency numbers are an improvement from last year, it’s clear the economy has not fully recovered from recession, as many people are still unemployed or underemployed.

“For somebody who’s working 20 hours a week at a retail job making minimum wage where three years ago they were working a factory job making $20 an hour working 60 hours a week, the pure unemployment number doesn’t tell the whole story,” Hoyes said.

He believes insolvencies will increase over the next year.

“If there’s any kind of shock to the system, interest rates go up, anything like that then obviously we’re going to have a big increase in the numbers.”

Mortgages, as opposed to credit cards or lines of credit, will be the biggest burden Canadians face this year, as interest rates are expected to rise by at least 1%, making mortgages more expensive to carry.

“There’s a lot of people right now who have mortgages at 3 or 4%,” he said.

“If interest rates were to rise by 3% now all of a sudden you’re paying twice as much.”