Why are we in debt?

An interesting study has just been published by Dr. Janis Sarra, of the Faculty of Law at the University of British Columbia, which focuses on 4,000 cases of bankruptcy and consumer proposals filed in 2009 and 2010 across Canada.

Causes of financial problems

The first observation concerns the reasons for the financial difficulties that led these people to consult a trustee:

Insufficient income 35%
Unemployment 18%
Overindebtedness 12%


These results are not surprising. The cost of life continues to rise and two household incomes are often not enough to cover current family expenses, not to mention the monthly payments on debt that is also increasing.

According to our experience, our lifestyle too often exceeds our disposable income, resulting in a slow but steady increase in debt. This is called the “Debt Virus”.  It infiltrates our lives unannounced.

Extent of debt

The second observation that we stands out from the study concerns the debt found in the analyzed cases. The average debt on credit cards alone was $21,620! With a median interest rate of 19%, this represents more than $342 in interests going up in smoke every month! Even if only the required monthly minimum on the credit card is being paid (usually 3% of the monthly balance), that is still $648/month for the payment of only one type of credit.

Why do people put themselves in debt with credit cards that hold a higher interest rate than a personal loan or credit line? Answer: Accessibility. The study reports that the inability to have access to a personal or consolidation loan or a line of credit is a major reason to “choose” this type of expensive debt over a less expensive, but harder to obtain, credit tool.


The study also examined the behaviour of Canadians as a whole with regards to their most important asset: their house/condo. Back in the day, we purchased a house early on in our economic life cycle and we were able to finish paying the mortgage once middle age was reached (55-60 years).  It appears, that this trend has changed. The popularity of credit lines, the rising real estate costs, and mortgage refinancing to cover current expenses, have all contributed to distance ourselves from this idea.

In fact, the study points out that 34% of retirees, aged 55 and up, are still paying for their mortgage. The idea that we can live with a lower income at retirement due to less expenses is therefore not as true as it once was. Thus, for many people reaching retirement age, a part-time job is often necessary to make ends meet every month.


The line between debt and over indebtedness is thin. We must, more than ever, be cautious, well-informed and exercise restraint in order to avoid falling in the debt trap that often leads to indebtedness.