THE BLOG

What Triggers Personal Financial Collapse?

10/03/2013 12:13 EDT | Updated 01/23/2014 06:58 EST

Statistically, Canadians are carrying massive levels of debt, with the debt to household income ratio at an all-time high of over 165 per cent at the end of last year. In simple terms, if you earn $1, you have $1.65 in debt. With these high debt levels, why isn't everyone in Canada with debt already bankrupt?

The main reason is that interest rates are low, so if your monthly payments are manageable, you can service the debt. That's a key point: it's not the level of debt alone that will bury you; it's the cost of carrying that debt. As long as interest rates and unemployment remain low, the average Canadian will be able to continue servicing their debt.

The bankruptcy rate in Canada is at its lowest level in four years, but despite the apparently robust economy there were still almost 118,000 Canadians who filed a consumer proposal or personal bankruptcy in the last year, according to the most recent government statistics.

So why are most Canadians managing to survive with high debt levels, but a significant number cannot? What's the difference between surviving and hitting your personal debt ceiling?

Based on my research, two out of three bankruptcies are caused by an unexpected event, such as a job loss, marriage break down, or an illness, injury or other health problem. These triggers start the debt-stress cycle, where you use credit to survive, which only makes matters worse by further increasing your debt.

The solution is to anticipate the triggers, and make a plan to deal with them in advance.

Over the years I have met with thousands of people who "unexpectedly" lost their job. My advice: assume you might lose your job at some point in the next year, and make a plan now to deal with that job loss.

Give that some thought: if you knew you would lose your job next month, what would you do differently today? The answer is that you would probably freshen up your resume (and your LinkedIn profile), you would be on the lookout for other job opportunities, and you would probably attempt to build up some cash to get your through a period of unemployment.

There is no guarantee that you can plan for every possible trigger, but it is better to think about it now, reduce your debt levels while you are working, and have a plan for the future.

Do you have a plan to deal with unexpected triggers?