02/03/2014 05:13 EST | Updated 04/05/2014 05:59 EDT

Why a Higher Minimum Wage Won't Reduce Bankruptcy Rates

The government of Ontario has announced that the minimum wage will increase to $11 per hour on June 1, 2014. Putting more money in the pockets of the working man or woman should reduce the bankruptcy rate, right?

I doubt it.

Based on our "Joe Debtor" study, the average person who goes bankrupt looks a lot like the average person in Canada. They are in their 40s, many of them have a family, and they earn around $40,000 per year before tax. The typically bankrupt is not a person working for minimum wage at a fast food restaurant.

Bankruptcy is not directly caused by a lack of income. Bankruptcy is the result of having too much debt. Our average client owes $60,000 when they go bankrupt, and that does not include their mortgage or car loan.

If you are working for minimum wage it is unlikely that a bank or credit card company will loan you anywhere close to $60,000. Your income is low, so you are unable to borrow excessively, which means you are unlikely to be a candidate for bankruptcy.

I am not suggesting that people earning minimum wage don't go bankrupt. They do, but in most cases they incurred their debt when they had a higher paying job, and they found it necessary to take a minimum wage job after they were laid off from their previous career.

Where individuals earning minimum wage do get into trouble is with the type of debt they take on. Those with a higher income can often qualify for a line of credit or car loan at good rates and they probably own a house that can be used as collateral if needed. If you earn minimum wage the bank will not give you a low interest line of credit. If you need to finance a car, you may not qualify for the best rates there either.

Minimum wage earners who do need credit often have to resort to high interest credit card debt, or a high interest loan (at 30 per cent interest) at a finance company. Unfortunately many also become a regular payday loan borrower, using bad credit sources to make ends meet. In fact, in our study 12 per cent of our clients owed money on an average of three payday loans totaling almost $2,500.

If you use debt to spend more than you earn, you risk bankruptcy. Too much debt is a problem that does not show bias because of your income. I have done bankruptcies for doctors, lawyers, bankers, as well as for fast food workers.

Debt does not discriminate, which is why my advice is always the same: avoid debt.


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