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Will The Bankruptcy Rate in Canada Plummet in 2010? A sign of economic recovery or something else completely?

by Barton Goth

Barton Goth, Canadian Bankruptcy TrusteeThe media has recently carried stories that that the Consumer Bankruptcy Rate in Canada is Starting to Ease, which sounds like good news. In October, 2009, bankruptcy filings across Canada fell a whopping 27.7 percent in October when compared to the previous month, which is the largest monthly drop on record. This figure softens when you include proposals filed in the same months to 19%, but it is still the largest monthly decrease in the last two years.

On the surface this could be taken as a great indication of where our economy is headed, as the total insolvency rate is an excellent indicator of a nation’s fiscal health. But we all must be cautious in the way we interpret statistics. Before we draw any conclusions it is important to examine a few more details:

  • Based on a 12 month year to year comparison as of October 31, 2009 there has been a 31.9% increase in the total number of insolvency filings in Canada
    •
  • Of the 156,255 total filings in Canada 149,350 of these are consumer filings (i.e. individuals) and the remaining 6,905 are business filings over the same period. So the consumer filings represent 95% of the total filings in Canada
  • The total consumer filings are up 34.5% from the previous year
  • The total business filings are down 7.7% from the previous year.

As we look at these statistics there are a few things that jump out at me.

First, it is very clear that the brunt of the recession has been born on the backs Canadian consumer as the business community has actually seen a reduction in the number of total insolvencies year to date.

Second, there are a great number of people who are having significant difficulties and likely will continue to struggle with their finances for some time.

Third, if we consider this in light of Statistics Canada’s most recent statistics on Canadian household debt, which put the Canadian debt-to-income level at 145%, the highest level since quarterly reporting started in 1990. For those of you who are not familiar with this economic indicator, 145% means that for every $100 of disposable income we carry $145 of debt. Clearly, while we have to question the current state of our economy, this still doesn’t explain the drastic decrease in total insolvency filings.
So how can we account for this dramatic decrease? Realistically this is a question that the statistics can’t adequately explain. So we have to look beyond the number and appreciate the context of these statistics.

For those of you who are unaware, September 18, 2009 was a very significant day for those who are currently struggling with their finances. On September 18, 2009 major amendments to the Bankruptcy and Insolvency Act became law, and this legislation had some very dramatic changes. Some of the more significant changes were as follows:

  • Consumer proposal debt limit has been increased
  • RRSPs are now exempt from seizure in most cases
  • Secured loans and leases cannot be terminated due to bankruptcy
  • Bankruptcies involving surplus income will last longer
  • Large tax debts may cause a longer bankruptcy
  • Student loans will be discharged after seven years

The implementation of these changes was first announced to the insolvency community early in August 2009, and while it took a little time for the changes to be digested and communicated to the rest of the country, the net effect was a dramatic increase of people rushing to file a bankruptcy in an effort to file prior to these changes coming into effect. Again, I can’t prove that the reason for this rush was these changes, but I can tell you that not only was there was a dramatic increase in the volume of my calls, emails and blog postings during that period, but a vast number of those inquiries expressed a need to proceed prior to the implementing of those changes.

Now that the changes are implemented, we have definitely seen a decrease across the insolvency community of total filings in each month, but on average the overall trend of the number of people suffering from economic instability has continued to increase steadily over the course of the last few months. For now this is something that appears to be continuing, but we anticipate that as the economy stabilizes the pace of insolvency filings should also settle in line with historical norms.

Regardless of the economy, people always have trouble with their finances. Whether these troubles are due to our dependence on credit, the aggressive lending practices employed by the lending community, health and employment issues, the lack of financial education provided or for reasons that are completely different, it is important is to recognize that there are governmental programs that are designed to assist people when finances get out of control and whether we are looking at the filing of a consumer proposal, a bankruptcy, or one of the other available options, there are many ways that can allow you to regain control of your finances. Contact a bankruptcy trustee for further information.

Posted on Monday, January 11th, 2010
Filed under: bankruptcy Canada andbankruptcy reform andConsumer Proposal andDebt Options
posted by Barton Goth @ 4:18 am No Comments

The Price of Progress: New Bankruptcy Rules Hurt Some People They Were Designed to Help

by Barton Goth

Barton Goth, Canadian Bankruptcy Trustee

Barton Goth, Bankruptcy Trustee

One of the longstanding and fundamental purposes of the Bankruptcy and Insolvency Act of Canada has been to allow honest but unfortunate debtors to deal with unmanageable debt so that they can make a fresh start and resume their places in the community. For those of you who are unaware, September 18, 2009 was a very significant day in the Canadian Insolvency community, as some major amendments to the Bankruptcy and Insolvency Act were implemented. Many of the changes greatly anticipated and long overdue, some examples include:

  • Increasing the limits for consumer proposal from $75,000 to $250,000 in non-mortgage debts;
    Reducing the time limit that must elapse prior to Student loans being eligible to be discharged from 10 years to 7;
  • The creation of a federal exemption making RRSPs now exempt from seizure;
  • Implementing a clause that stipulates secured loans and leases cannot be terminated simply due to the filing of a bankruptcy;

As you can see, many of these new amendments are very positive and go a long way to enhancing our current insolvency system. However, as with any type of change often there are unanticipated consequences and it is these unanticipated consequences that cause me some concern. While the vast majority of these amendments were positive, I feel that there are a few that are not consistent with the original purpose of this legislation.

For example, earlier this week I met with a 56 year old gentleman who had recently suffered a very serious heart attack and as a result is awaiting surgery. This heart attack has dramatically changed his ability to function on a daily basis and left him unable to work in his field of expertise. As I met with this individual, I learned that he had been bankrupt before. In fact, he filed for bankruptcy in 1981. This bankruptcy was largely a result of conditions that were beyond his control. At the time he was operating a small proprietorship that was servicing the oil and gas industry and, by all accounts, was doing reasonable well for himself.

But unfortunately, as many people may remember, this was a very difficult time in the oil and gas sector due to a combination of political and market conditions. As a result, this gentleman was one of many who was left without work and no prospect of work for quite some time. Without going into too much detail, this first bankruptcy, which occurred approximately 28 years ago, proceeded smoothly and a discharge was successfully obtained without any difficulties, and from by all appearances this gentlemen seems to have spent the last 28 years working hard to raise a family and support 5 children.

Throughout this time he has remained steadily employed, made regular contributions to an RRSP, only once had to rely on Employment Insurance and overall appears to have done everything that could be expected. Having learned his lesson from the first bankruptcy, he didn’t regularly carry large amounts of debts, has always driven used vehicles and seems to have been fairly prudent. Unfortunately this all changed on July 15, 2007, the date of his first heart attack. This first heart attack wasn’t terribly serious in the grand scheme of things, but it was the first of three, and the third heart attack was very severe, so severe that he is now awaiting surgery and has been told that he will never be in a position where he will be able to resume his previous activities.

The net effect of all of this is that since July 15, 2007 he has only been able to work intermittently. At first they were able to rely on his wife’s income and some Employment Insurance benefits and this worked well until near the end of 2007, when his wife was laid off. As a result of this lay off they had to use most of their RRSP’s to survive, as the small disability pension simply wasn’t enough. This seemed to work until the RRSP’s ran out and being left with no other choice they began to supplement their deficit each month with credit cards and the like, all the while planning on paying things back as his health improved.

So now this man and his wife live very modestly and try their best to survive on total household income of $3400, of which he was bringing in an estimated $2360 net each month. As I visited with this couple, it was very clear that I was dealing with honest people who were in a very unfortunate position. The end result is that they can afford to live, but they cannot afford to pay back an estimated $58,000 of debt, when you factor in the shortfall from the truck that used to be required for work.

Here is the problem: based on the changes to the Bankruptcy and Insolvency Act this person the estimated cost of bankruptcy in this situation would be $409.88 a month, an amount that will be a struggle to pay. This payment will also last for a total of 36 months, which will result in a total cost of a bankruptcy of approximately $14,755.76. While this is obviously a fraction of the total debt, we have a two people on the verge of retirement who are supposed to be in some of their highest paid years in the job force, who now have to struggle for the rest of their lives just to get by.

Now the question I have been wrestling with is whether or not this is consistent with the overall goal of a system that permits an honest debtor, who has been unfortunate, to secure a discharge so that he or she can make a fresh start?

This is an example of one of the unanticipated consequences that unfortunately represent the price associated progress. Not to suggest that this is the only problem with the legislation, but it is simply an example that I use to demonstrate some of the difficulties that still remain. While I don’t believe this was intended by anyone involved in the process and credit many of the misgivings implicit in these amendments to the manner in which this legislation had to be rushed through the legislative process in an effort to gain approval prior to falling of a minority government.

I do believe that it is important for Insolvency Professional’s across Canada to do our part to identify the remaining issues in an effort to make sure that the Superintendent of Bankruptcy, our Federal Government and of the other stakeholders recognize that while improvements have been made, there is still work that needs to be done.

For those of you are curious about what can be done when if you are in a situation similar to the one above, the best advice is to talk to a local trustee. In the above situation, the debtor decided that the filing of consumer proposal was going to provide a way to avoid a bankruptcy and some of the more negative consequences of a second bankruptcy but still enable a way to deal with the debt in a manner that reduced the total amount he would have to pay and to do so in a fashion that would fit into his budget.

Posted on Monday, November 30th, 2009
Filed under: bankruptcy Canada andbankruptcy reform
posted by Barton Goth @ 9:53 am No Comments

Retirement, Pensions and Bankruptcy in Canada: The Future Is Up To You

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

There were three interesting stories in the press this week about pensions and bankruptcy in Canada.

On Wednesday the CBC ran a story on how the Liberals vow to change bankruptcy laws. Here’s a quote from the story:

The Liberal Party says it is committed to changing Canadian bankruptcy laws so former employees of failed companies like Nortel don’t lose their pensions and disability benefits when their employer goes bust.

“You gotta know that I’m hearing you loud and clear — the Bankruptcy Act must be changed,” Liberal Leader Michael Ignatieff told Nortel pensioners at a rally on Parliament Hill Wednesday.

Ignatieff said his party will be meeting Monday to discuss new proposals for the pension system. Liberals are committed to changing bankruptcy laws “so that you are not left at the back of queue in insolvency and bankruptcy,” Ignatieff said. “It’s not right; we agree with you.”

The basic point being made by Mr. Ignatieff is that it’s possible for a company to go bankrupt, and as a result workers can lose their pensions. He uses Nortel as an example, a once proud Canadian company that is now bankrupt.

The second story was written by David Olive, in the Toronto Star, and he took the opposite view: Pension Crisis: Not So Fast. He makes the point that Canadians have many sources of retirement income, including company pensions, and the Canada Pension Plan, and RRSPs. Outside experts have determined, in fact, that Canadians have pension protection as good or better than anyone else in the world.

In the third story the Globe and Mail discusses the Illusion of Pension Security in Canada, and makes the point that only 30% of Canadians have employer sponsored defined benefit pensions, so the “pension crisis” is nothing new.

So which view is correct? Should Canada’s bankruptcy laws be changed, or are we on the right track?

Unfortunately for Mr. Ignatieff, changing Canada’s bankruptcy laws is not a practical solution. First, as readers of this weekly column are very well aware, Canada’s bankruptcy laws were amended back in 2005, and 2007, but the final changes did not come into force until September 18, 2009. You can read all about the new rules in our posts on the new bankruptcy rules in Canada. Given the speed the government has worked in the past, if he wanted to make changes, it would be years before any changes were implemented.

Second, changing the bankruptcy laws misses the point. First, if only 30% of Canadians have a pension plan through work, that means most of us don’t have one, so changing rules to protect something we don’t have serves no purpose. In addition, the employee’s pension plan is not an asset of the company. It is a separate fund, entirely for the benefit of the employees. When a company goes bankrupt it’s assets are liquidated, and the proceeds go to the creditors. The pension is not liquidated; it’s not part of the company’s assets.

In simple terms, each pay period the company contributes money to a separate fund, and it is that fund used to fund the employees retirement. The best way to protect an employee’s pension is to protect the fund. The government should enforce rules to ensure that pension plans are adequately funded. If they are, even if the company goes bankrupt, the money will be in a separate fund to continue to pay retirement benefits to the employees.

The answer, then, is not to change bankruptcy laws, but instead to ensure pensions are properly funded. That can be done by enforcing the existing rules.

I’m not opposed to changing bankruptcy rules. Unfortunately, when a company goes bankrupt, there is usually very little money to distribute, so even if the pension plan got whatever money was available, it may not be enough. So, changing the bankruptcy rules would offer little protection to workers. Enforcing existing rules to ensure that pensions are fully funded is a more logical solution.

Even more important, however, is that you must look out for yourself. Every day I meet with people in financial trouble, and I give all of them the same advice: I can show you how a consumer proposal or a personal bankruptcy will deal with your debts, but only you can adjust your spending or increase your income so that you don’t have debt problems in the future.

The same advice applies to your pension. You can rely entirely on your employer, or the government, to take care of you when you retire. Or, you can take some of the responsibility yourself. If you were to start at the age of 35 and put $200 per month in a savings account, you would contribute $72,000 to your savings account by age 65. If you contributed that money to an RRSP, and re-invested your tax refund each year, and if you earned interest on your savings, you could easily have a quarter of a million dollars, or more, by the time you retire. But that’s up to you. You have to decide to save $200 per month; no-one else will do it for you.

I realize that some people simply cannot save $200 per month. Some can save more, some can save less. But when you calculate how much you spend on coffee, or fast food, or smokes, most people can find a few dollars each month to save. (There are lots of great money saving tips on the internet to give you ideas).

But what about you? Should you rely on the government to fund your retirement? No, you should rely on yourself.

The maximum benefit paid by the Canada Pension Plan at age 65 is $908.75 per month. If CPP will be your only source of income when you retire, and if your living expenses are more than $908 per month, you will have a problem.

My advice? Make a decision, right now, to plan for your retirement. Here’s what you should do:

1 Start by making a personal budget. Make a list of what you spend each month, and decide what expenses you can cut to increase your savings.

2 Eliminate your debts. There is no point in putting money in a savings account earning 1% interest if you are paying 20% interest on your outstanding credit card balance. Review your debt management options, and make a plan to start dealing with them. You may be able to deal with your debts on your own, or you may need to file a consumer proposal or personal bankruptcy to get a fresh start. Regardless of the solution, the sooner you start, the sooner you will have a solution to your money problems.

3 Start saving. Once you know what you spend, and you have eliminated your debts, you can start a savings plan. The sooner you start, the more you will save. Set up two bank accounts: one for purchases you need to make within the next year (such as for Christmas, or car repairs), and the other will be long term savings for the future (for your children’s education, or to buy a house, or to fund your retirement).

If you decide that your future is up to you, you can start making positive changes now, and you won’t have to rely on the government changing bankruptcy laws in the future to protect your retirement.

Posted on Monday, October 26th, 2009
Filed under: Bankruptcy Alternatives
posted by Doug Hoyes @ 4:48 am 6 Comments

The Insanity of the New Bankruptcy Rules in Canada

by Ted Michalos

Ted Michalos, Bankruptcy Trustee

Ted Michalos, Bankruptcy Trustee

On September 18, 2009 the government of Canada brought into force all of the remaining amendments to the Bankruptcy and Insolvency Act that were approved by Parliament back in 2005 and 2007.  At the time they were approved, the economy was booming and bankruptcy filings by individuals were stable.  One of the goals of the new law was to encourage people to consider filing a consumer proposal as an alternative to personal bankruptcy.  The law did this by dramatically increasing the cost of filing personal bankruptcy.

In 2005 the economy was booming. Today, the economy is in shambles.  Personal bankruptcy filings are at an all time high.  Unemployment is rising and people that in the past had no concerns about their jobs are now afraid that they may get “downsized” too.   So, at a time when a record number of Canadian families are experiencing financial difficulties, what does the government do?  They bring into force all the changes they passed when times were good.  Insanity.  There is no other word for it.

In a strong economy, the plan of increasing the cost of bankruptcy in Canada to encourage people to file more consumer proposals made a certain amount of sense.  If a person is working with a stable income, then you can argue that they should try to repay part of their debt.

In a weak economy, with unemployment on the rise, EI benefits running out, and no prospects of a “job rebound” in sight all these new rules do is force people that have no realistic ability to repay a portion of their debts (via a proposal) to remain in bankruptcy for a much longer period of time.

So that we’re clear, the new rules extend a first time bankruptcy for individuals from 9 months to 21 months, if their household income is $200 above the government standards.  For example, a family of 4 is allowed income of $3,474 per month.  If they have income in excess of $3,674 per month their bankruptcy will be automatically increased from 9 to 21 months.   Every month you remain bankrupt there is a cost (payment) that must be made.  Let’s say they were required to pay $250 per month.  Under the new rules they’d be required to pay $250 per month for 21 months, or $5,250.  Under the old rules the total payment required would be only $2,250 ($250 per month for nine months).  That’s quite a difference for a family struggling to pay the rent.

A single person has a surplus income threshold of $1,870.  So, if they earn $2,070 per month or more their bankruptcy will run 21 months.  The fellow on EI won’t get caught by this rule – their income will be below the $2,070 limit and their bankruptcy will run 9 months.  If, however, they find work during the bankruptcy, such that their income rises above the limit the law automatically kicks in and they are required to pay for 21 months.

A lot of people may read this and say, “ok, bad luck for them, but it is still less than what they owe”…  That is true, but what most people don’t realize is that more than 10% of all Canadians will file for bankruptcy at some point in their lives.  If one of the goals of the new law was to encourage people to file consumer proposals (instead of bankruptcy), it does not make any sense to bring those rules into place when the economy won’t allow people to file a proposal.  The income is simply not there.  Insanity is the politest word I could find for it…

Posted on Monday, October 19th, 2009
Filed under: bankruptcy Canada andbankruptcy reform andConsumer Proposal
posted by Ted Michalos @ 5:02 am 1 Comment

Thanksgiving Day in Canada

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

Today is Thanksgiving Day in Canada, and there are many stories in the media about how we should all give thanks. I agree. We are lucky to live in Canada. But what does Thanksgiving have to do with bankruptcy in Canada?

I have written a number of articles over the last two months criticizing some of the new bankruptcy rules. I have offered the opinion that some of the rules are unnecessarily harsh towards Canadians in financial trouble. That’s true, but there is another side to the story.

Every week I meet with many Canadians who are at the end of their financial rope. They usually tell me that their money problems got worse when they lost their job, or had their hours cut back, or they got separated or divorced, or they had a medical condition that impaired their ability to earn a living. When they visit me for the first time they are embarrassed and depressed. They don’t know what to do or where to turn.

The most rewarding part of my job is when I can show them that there are options for dealing with financial problems. Some people can re-finance or sell their home to generate the cash necessary to deal with their debts. Others can offer a debt settlement or a debt management plan. For many, a consumer proposal is the perfect solution. For a growing number of Canadians, personal bankruptcy is the only answer.

As Canadians, we can be thankful that we have so many options for dealing with debt. Gone are the days of Charles Dickens’ England where people who couldn’t pay were put in debtor’s prison. At least one each week I talk to someone who is afraid that if they don’t pay their debts they will go to jail. Not paying your debts is not a criminal offence in Canada. A creditor can take you to court and get a wage garnishment, but jail is not the result of not paying debts.

As the recession in Canada continues, we worry about our future. But today, as Canadians, we can be thankful that there are options for dealing with debt. I may not agree with all bankruptcy rules, but I do strongly support the basic principal behind bankruptcy legislation in Canada: the rehabilitation of the honest but unfortunate debtor.

You too can be thankful for your options, so contact a trustee today to review your options, and work out a plan to deal with your debts. You will be thankful that you did.

Posted on Monday, October 12th, 2009
Filed under: Bankruptcy Alternatives
posted by Doug Hoyes @ 5:36 am No Comments

Finally some good news for Canadians facing Bankruptcy

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

Apparently it is possible to “Fight City Hall”. Let me explain.

Back on September 14, 2009, five days before the new bankruptcy rules came into force, I posted an article describing the Bad News and Good News from the new bankruptcy rules. One of my biggest complaints about the new rules was a new disclosure requirement; here’s my quote from that post:

I also worry that the government has introduced new disclosure requirements. Now, when you go bankrupt in Canada, you are required to disclose your highest level of education. You must now tell the creditors whether or not you graduated from high school or university. Personally, I find this new disclosure requirement offensive. I don’t think whether or not you are a high school graduate is relevant. The creditors need to know what you own and who you owe, but information about your educational background is not necessary for them to evaluate your situation. What’s next? Questions about your ethnic background? Religion? Where does this end?

Think about it: for most people, the decision to declare bankruptcy is very stressful. It’s difficult enough to pull together all of your financial information and make the decision to go bankrupt. It’s even more embarrassing if you have to declare on a sworn statement to your creditors that you didn’t graduate from high school, or that you are a university graduate and still have financial problems. Either way, your education level is completely irrelevant information.

My job as a bankruptcy trustee in Canada is to ensure that all bankruptcy rules are applied fairly. When I believe that bankruptcy rules are unfair, I speak up.

Back in February, 2008 my business partner, Ted Michalos and I appeared before the Senate Committee on Banking, Trade and Commerce in Ottawa to present the case for rules that would be more fair to the average bankrupt Canadian. We were the only trustee firm in Canada that appeared before the Senate Committee. (You can watch our testimony on our Senate Video page). In May I wrote letters to the Prime Minister and the Industry Minister asking them to eliminate the uncertainty and either pass or abandon the new rules. The Prime Minister and Industry Minister both responded, saying they were working on it.

When I first discovered that the government was going to require bankrupts to disclose whether or not they graduated from high school, I was offended, and I took action. As mentioned above I mentioned it on this blog, but I did more than that.

On September 10, after not getting an explanation from anyone at the government, I sent an e-mail to the Superintendent of Bankruptcy himself. Here’s what I said:

My apologies for bothering you with this matter, but I haven’t been able to find anyone else who can give me an answer.

One of the changes resulting from the new bankruptcy rules to be implemented on September 18 is that a bankrupt person must now disclose on their statement of affairs the highest level of education they have received (such as grade 8, attended high school, high school graduate, or university graduate).

We are finding that many bankrupts find this disclosure to be somewhat embarrassing. Either they are embarrassed by their lack of education, or embarrassed that they are educated and still got into financial trouble.

I can’t find anything in the legislation passed by Parliament requiring this disclosure, so I assume this is data that the Office of the Superintendent of Bankruptcy has chosen to gather.

Is that correct?

If so, can one of your staff provide us with the rationale for collecting and distributing this information, so that I can explain it to our bankrupts.

Thanks for your assistance.

About a week later I got an e-mail from a junior staff member saying “we’re working on it”. (That seems to be a typical response from the government, doesn’t it?).

Then, on Saturday morning, I received word that the government had changed their mind and would no longer require this disclosure! Although I’m sure I was the first trustee to raise this issue with the Superintendent’s office, I know that last week many other bankruptcy trustees in Canada also made phone calls to the government to complain about this invasion of privacy, so I can’t take the credit for ending this silly requirement. However, I am proud of my fellow trustees for lobbying the government to change this rule.

Most trustees in Canada are like me: we are obligated to follow the rules, even when we don’t fully agree with them, but we also are willing to speak up when the rules are unfair, and we work to change them.

The new rules are still new, so there will be a lot of learning happening over the next few months as we become familiar with all of the nuances in the new rules. Rest assured, however, if you are in financial trouble a bankruptcy trustee will take the time to explain the rules to you in detail, and help you understand which option is best for you.

Please consult a Canadian bankruptcy trustee to arrange for a no charge initial consultation so that you can understand the rules, and decide which option is best for you and your family.

Posted on Monday, September 28th, 2009
Filed under: bankruptcy Canada andbankruptcy reform
posted by Doug Hoyes @ 4:39 am 2 Comments

The New Bankruptcy Rules: Some Predictions

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

Since the federal government announced back on August 19 that new bankruptcy rules in Canada would come into force on September 18, 2009, I have posted three articles describing the new bankruptcy rules in Canada. For an overview of the new rules, please see the following articles:

As promised, the new rules came into effect on September 18; what happened? Here’s an insider’s view:

My firm, Hoyes, Michalos & Associates Inc., serves debtors from 20 offices in Ontario, so we have a large representative sample of people in financial trouble. As soon as the new rules were announced, we received a flood of calls from people in debt. Many of them wanted to file before the new bankruptcy rules were implemented, because under the new rules if you have surplus income of more than $200 per month, your bankruptcy is automatically extended for an extra year. For example, in a first bankruptcy under the old rules $300 per month in surplus income would still mean you were probably discharged in nine months. Under the new rules, you are now automatically bankrupt for 21 months, and that means you are now paying for 21 months. In short, your bankruptcy will cost twice as much as before, which is what caused the flood of calls to our offices.

As a result, on September 17 we filed three times as many personal bankruptcy filings as we would on a normal day. In fact, across Canada there were about 1,700 personal bankruptcies and consumer proposals filed, which is also about three times the normal number. Obviously Canadians wanted to get their bankruptcy filed under the old rules.

Here’s another interesting note: On September 18, the first day of the new rules, the government’s electronic bankruptcy filing system was down! As a result, there were no bankruptcies filed on Friday September 18. I’m amazed that the system would not work given the many years the government has had to implement the new rules, but that’s the way it goes sometimes.

What do I see for the future? I have two predictions.

First, I suspect that all bankruptcy trustees in Canada will be doing some very detailed math to explain the surplus income calculation to every debtor before they file bankruptcy. Seven months into each bankruptcy the trustee is required to determine the bankrupt’s average income over the first six months, and if their average income per month is more than $200 over the limit, the bankruptcy is extended. If a bankrupt is paid a salary twice a month, their income doesn’t change, so the calculation is easy.

But what happens if you are paid either weekly or bi-weekly? If you get paid weekly, there are four months each year where you get five paycheques per month, and that may cause your average surplus income to exceed the limit. The same is true for a person paid bi-weekly in a three paycheque month. I suspect that the result of these new rules will be that bankrupts may delay their filings until after their extra paycheque month.

For example, if you are paid weekly on a Friday, a quick check of the calendar will reveal that there are five Fridays in October. That may mean that weekly payees will want to wait until November to go bankrupt. When you meet with your trustee, be sure to ask them to explain the implications of these new rules in your specific situation.

Second, as I have already predicted, I believe the number of consumer proposals will increase. If you are expecting a Christmas bonus, or overtime, that may be enough to increase your income such that your bankruptcy will last for an extra year. In that case a consumer proposal may be the preferred solution. You can negotiate a set monthly payment that won’t increase, even if your pay goes up.

All trustees in Canada are quickly learning and adapting to the new rules, so it is imperative that you consult a Canadian bankruptcy trustee to review how these new rules will impact on your situation, so that you can make a fully informed decision to deal with your debts.

Posted on Monday, September 21st, 2009
Filed under: bankruptcy Canada andbankruptcy reform
posted by Doug Hoyes @ 1:49 am No Comments

New Bankruptcy Rules in Canada: The Bad News, and the Good News

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

After waiting for four years, the new bankruptcy rules finally come into force on September 18, 2009. The new rules will have a significant impact on many Canadians in financial trouble.

When the new rules were announced in August I posted a summary of what you need to know about the new bankruptcy rules in Canada. If you are not familiar with the new rules, this is a good summary.

I also posted an article on the most radical new change: the surplus income rules have changed, so bankruptcy will now last longer for many Canadians. Under the old rules most first time bankruptcies lasted for nine months. Now, if your monthly net income is more than $200 higher than the limit set by the government, your bankruptcy will last an extra year, and you will be required to make payments to your creditors for an extra year.

Here’s a simple example: Fred is single with no dependants, and he earns $2,470 per month in take home pay, after taxes. The surplus income threshold for a single person in 2009 is $1,870 per month, so Fred has $600 per month of surplus income. He is required to pay $300 per month in surplus income payments for the length of the bankruptcy.

Under the old rules if this was Fred’s first bankruptcy and there were no objections, Fred’s bankruptcy would probably last for nine months, so his surplus income payments of $300 per month would last for nine months.

Under the new rules Fred is automatically bankrupt for 21 months, so his surplus income payments of $300 per month will last for 21 months.

That’s the bad news. The good news is that it will now be easier to file a consumer proposal as I reported last week. Under the old rules you could only file a consumer proposal if your debts were $75,000 or less. Now you can file a consumer proposal if your total debts, not including the mortgage on your principal residence, are less than $250,000. That will make it easier for many Canadians to avoid bankruptcy and file a consumer proposal.

Unfortunately it was only on August 19, 2009 the government announced that these new rules were coming into force on September 18. That means that trustees across Canada have only had 30 days, in the middle of the summer vacation season, to prepare for the new rules. That means there will be lots of confusion surrounding the new rules, so we will all need to be patient as we work through the new calculations, rules and directives.

My biggest complaint is that these new rules were created back in 2005 when the Canadian economy was booming. The federal government decided that the bankruptcy process was too easy, and needed to be lengthened. That may have made sense in 2005, but it’s now 2009 and we are in the middle of the most serious recession in our lives. Now is not the time to make the bankruptcy process even more difficult for the average Canadian. In hindsight it would have been nice if the government had delayed lengthening the bankruptcy process until the recession was over.

I also worry that the government has introduced new disclosure requirements. Now, when you go bankrupt in Canada, you are required to disclose your highest level of education. You must now tell the creditors whether or not you graduated from high school or university. Personally, I find this new disclosure requirement offensive. I don’t think whether or not you are a high school graduate is relevant. The creditors need to know what you own and who you owe, but information about your educational background is not necessary for them to evaluate your situation. What’s next? Questions about your ethnic background? Religion? Where does this end?

However, regardless of my opinions on the new rules, they are here. Some people will benefit from the new rules, others will not. Regardless, you should deal with a trustee that fully understands the new rules, so please consult a Canadian bankruptcy trustee to arrange a no charge initial consultation to review your situation and determine which option is best for you to deal with your debts.

Posted on Monday, September 14th, 2009
Filed under: bankruptcy Canada andbankruptcy reform andConsumer Proposal
posted by Doug Hoyes @ 4:05 am 3 Comments