With a trade war now under way, it’s important to establish a baseline on how the nation’s personal finances are holding up. For some insight into how people are managing debt, I invited veteran insolvency trustee Doug Hoyes to do a Q&A for this newsletter. Here’s an edited version of our back-and-forth by e-mail:

Q: Doug, can you start us off with a quick overview of your experience as a bankruptcy trustee?

A: I became a Licensed Insolvency Trustee 30 years ago. After working for two big accounting firms for several years, my business partner Ted Michalos and I co-founded Hoyes, Michalos & Associates Inc. 26 years ago.

Q: We’re in a trade war with the U.S. that could push the economy into recession. What can you tell us about how well Canadian households are doing with current debt loads?

A: In my opinion, we are already in a recession. Canadians are already struggling with high debt loads, and I expect the problem to worsen in 2025 and 2026. Each year, we release our Hoyes Michalos Joe Debtor Bankruptcy Study, which analyzes the profile of our typical client. Our most recent study found that our average insolvent debtor owed $60,678 in unsecured debt, an increase of 12.2 per cent from the previous year. That’s the largest increase since we first did the study in 2011. Driving this surge in debt was a massive rise in credit card debt, with average balances up almost 26 per cent to $20,398.

Q: What’s behind this rise in debt?

A: The biggest problem is that living costs are increasing faster than people’s incomes. We all experience this every time we go to the grocery store. Between August, 2022, and February, 2023, food inflation was 10 per cent. While the inflation rate has dropped significantly, prices remain at all-time highs. Most Canadians’ incomes have not risen as fast as inflation, so they have less monthly cash to cover their living costs. When your budget is squeezed, if you have no assets to sell and you can’t get more hours at work, you resort to borrowing to make ends meet.

Q: Let’s talk about your clients. Can you give us a sense of their income levels?

A: In 2021, my clients’ average monthly take-home pay was just under $2,600. In 2024 it was $3,237. What’s happening is that higher earners, who in the past could make ends meet, are now pushed to the edge and are filing for insolvency. I expect the trend of higher-income earners having no choice but to declare insolvency will continue.

Q: How often are investment properties part of the story these days when you look at the finances of your clients?

A: In 2024, it was not an issue, but I expect a different story in 2025. I am now getting calls from people who tell me they bought a pre-construction condo five years ago, and now it’s closing, and they can’t come up with the money. I’ve heard many stories where people agreed to pay $1-million, but now the property appraises at $800,000, so they can’t qualify for a mortgage. Most of those properties have not closed yet, but there is a wave of closings scheduled over the next 24 months, which I predict will lead to a wave of insolvencies.

Q: Roughly 1.2 million people will renew mortgages this year and it’s expected that their interest rate will be higher than before. How well-prepared are these households for a bump in payments?

A: Many of them are not prepared. A $1-million mortgage with a 25-year amortization at 2 per cent is a monthly payment of $4,235. At 4 per cent, the monthly payment is $5,260. Many borrowers who lock in with low mortgage rates will see a more considerable increase. How many borrowers can afford an increase of $1,000 per month in their mortgage payment, when all of their other living costs have also increased? Most of the mortgage borrowers I talk to are hoping that rates fall before they renew. That’s their only plan. Most will likely opt for a variable rate mortgage hoping that rates continue to fall. They may survive if rates continue to fall, but if rates spike upwards, they are taking a considerable risk. I’m not a mortgage expert, so I have no idea what interest rates will do, but my advice to everyone is to reduce your unsecured debt as much as possible to free up cash to service your mortgage.

Q: People are increasingly engaged – I might even say obsessed – with their credit scores. What can you tell us about the credit scores of your insolvency clients?

A: Surprisingly, many of my clients have high credit scores when they file for insolvency. They are making their minimum payments, so their credit score looks good. However, they realize that they are about to max out their credit cards and won’t be able to continue to make the minimum payments, and so they file a consumer proposal to deal with their debt. Credit scores were created to help lenders decide how much they should lend you and at what terms. A high credit score does not imply that you are financially responsible. It may indicate that you are good at playing the game, shuffling debt from one card to another.

Q: Let’s have you close with some advice to Gen Zs looking at buying a home, a vehicle and starting a family: How can they borrow in a manageable way?

A: My advice is to start by eliminating debt. If you don’t yet have the responsibility of a family, you have the time to work extra hours (at your main job, or a second job or a side hustle). Living with your parents for an additional year may be financially worth it. Having one or two roommates helps. The key is eliminating debt to begin saving because you can’t buy a home without a down payment. Focus on eliminating debt and saving money more than building your credit score. I suggest you start with one or two credit cards. Pay the balance in full each month.

Don’t get any other debt unless it’s essential, such as to finance a car if it’s necessary for a better job.