Key findings from Hoyes, Michalos & Associates, one of Canada’s largest personal insolvency firms, show the Millennial generation are filing insolvency at a much faster rate than their entry into the workforce. Born between 1980 and 2000, Millennials in 2011 comprised 28 percent of the Canadian workforce, rising to 34 percent by 2018. Their report shows that during this time, Millennials filing insolvency increased from 14 percent to 37 percent of insolvencies, an increase of 162 percent. After the Silent Generation (those 73 years old and older in 2018), Millennials are the most likely of any generational cohort to blame financial mismanagement as a primary cause of their insolvency, including the overuse of credit.
Nearly two in five insolvencies are currently filed by Millennials and this trend is on the rise. On average, Millennial debtors owe CAD $35,733 in unsecured debt when they file insolvency. Nearly one third of carry student debt with an average loan of CAD $14,311 in 2018, an increase of 4.2 percent from the previous year. The HM&A report points to student loans as a significant factor in the rise in insolvencies, where one in five insolvencies involved student debt and 64 percent of student debt insolvencies are filed by Millennials. Under Canadian bankruptcy law, student loan debt is not automatically discharged by bankruptcy or a consumer proposal unless the debtor has been out of school for at least seven years. According to Canada Student Loans, students typically take between nine and 15 years to pay off their student loans in full.
The average tuition cost for a Canadian university is now CAD $6,500 with in-demand programs costing more than CAD $20,000 per year. The HM&A report shows that tuition hikes are taking their toll on recent graduates as higher debt upon graduation is not sustainable and therefore contributes to many graduates declaring insolvency much earlier than in the past. Overwhelming student debt is primarily a problem for women, where 63 percent of student debtors in 2017 were female, up from 58 percent in 2011.
In 2018, almost half of all Millennial debtors had at least one payday-style loan, up from 40 percent in 2017. Access to quick, low credit money is perhaps the largest debt epidemic facing Millennials after student debt, who need it to make ends meet month-to-month. Millennial debtors using a payday loan now owe a total of CAD $4,792 on an average of four loans, accounting for 15 percent of their total debt. Even more alarming, their average payday-style loan size grew from CAD $920 in 2017 to CAD $1,189 in 2018. 13 percent of all Millennial fast cash loans were for CAD $2,500 or more, up from 6 percent in 2017.
After declining steadily from 2013 to 2016, Millennials are returning to the use of credit card debt and lines of credit. As Millennials become older, they both apply for more credit cards and increase their credit card limits as their incomes rise. In 2018, Millennials with credit card debt owed an average of CAD $11,716 on an average of 3 credit cards, an increase of 6.9 percent from 2017 balances. Millennials are highly likely to use credit to pay for everyday goods and services, including entertainment, groceries, and clothes, as well as make online purchases with credit cards, which can lead to financial problems when credit is used to balance their budget. They often view minimum payments as just another monthly expense to be covered.
60 percent of insolvent student debtors blamed job loss or income related issues as a primary cause of their insolvency. Millennials are working, but it is not likely stable or permanent employment. The average Millennial debtor has a take-home pay of CAD $2,431, which is 3.9 percent less than the average debtor and 10.3 percent less than Generation X. After paying for housing, transportation, and living expenses, Millennials have only CAD $243 available to support unsecured debt repayment (excluding their mortgage and car payment), which is the lowest of any generational cohort. This is a problem when the average monthly interest cost on their debt is CAD $1,0334.
HM&A says the financial dilemma facing insolvent Millennial debtors is their limited ability to maneuver. While the average Millennial debtor income has increased from CAD $2,275 in 2017 to CAD $2,431 in 2018, that growth is not enough to cover debt repayment. In addition, Millennials are less likely to be able to refinance. The overall trend since 2013 is a percentage of insolvencies involving homeowners, however, Millennials are much less likely to own a home, especially those filing insolvency. Millennial homeowners who have entered the market likely bought at higher prices, limiting their ability to refinance.
The average Canadian insolvent debtor in 2018 owed CAD $49,289 in unsecured debt. HM&A also says the most significant trend in 2018 is the increased risk of filing insolvency faced by all ages; the average debtor lives paycheque to paycheque, which is why he uses debt to pay for everyday living costs. Canadians spend 40 percent of household income on housing, substantially more than the maximum 35 percent recommended by financial experts. Transportation costs take up another 19 percent and personal and living costs consume 31 percent of income, significantly more than the 20 percent recommended maximum. Only 9 percent of income is available to cover debts, an amount which is insufficient to cover even the monthly interest costs). This leaves nothing left over for savings or an emergency fund, and creates a cycle of debt reliance that leads to the use of payday loans, multiple credit cards and high interest term loans.
Since HM&A began their bankruptcy study eight years ago, total household credit has increased by 43 percent. Consumer debt, the types of loans dealt with through a consumer proposal or bankruptcy, rose 30 percent during this same period. An extended period of low interest rates made all this debt affordable and low rates provide a refuge against the economic consequences of all this debt. Delinquency rates remained low as did consumer insolvencies, until recently.
Bond bankers and investors at the annual meeting of the International Capital Markets Association in Stockholm warned that the heavy reliance on debt financing and slow economic growth are leading to the creation of debt bubbles, which risk destabilizing the entire financial system should a major shock occur. Ultra-low interest rates have prompted companies and governments to load up on debt faster than ever before, often selling bonds with less protection for investors. That has led to concerns that a turn in market sentiment could result in a credit crunch. Hans Stoter, global head of core investments at AXA Investment Managers told the conference, “There is much more debt in the world than there was before ... and most of that growth is coming out of debt financing with interest rates so low.” International Montery Fund (IMF) estimates show leverage in the system has increased 50-60 percent since the financial crisis a decade ago, with debt now worth some 230 percent of economic output globally.