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Debt and the Recession Lead to Massive Increase in Bankruptcy Rate in Canada

by Doug Hoyes

The bankruptcy rate in Canada increased by 31% in 2009, the largest increase in recent memory. In 2009 116,381 Canadians filed personal bankruptcy in Canada, and a further 35,331 filed a consumer proposal. That’s a total of 151,712 filings, as compared to 115,789 in 2008. These are obviously massive growth numbers, which raises the logical question: why?

The first and most obvious reason is that Canada suffered through a recession in 2009, and a recession leads to high unemployment. In fact, if you create a graph showing both the growth in consumer insolvencies and the changes in unemployment, you will find that they are very closely correlated. In other words, if unemployment goes up, the rate of bankruptcy filings goes up. If Canadians start finding jobs, the rate of bankruptcy filing will decrease.

The second obvious cause of bankruptcy is high debt. You don’t need to go bankrupt if you lose your job, but you have $1 million cash in the bank. With that kind of money, you would probably just retire, and not bother looking for another job. But, if you are carrying a lot of debt, and your income drops, you may have no choice but to file bankruptcy to deal with your debt. Unfortunately in Canada, as we discussed last week, personal debt in Canada is a ticking time bomb, with the average Canadian carrying more debt than ever before. High debt is a very big problem.

Bankruptcy Canada growth in 2009

But there is more to the story than simply high debt and a serious recession. On September 18, 2009 new bankruptcy rules came into force in Canada, and that caused a spike in personal bankruptcy in the weeks before September 18, and a drop in bankruptcies after September 18. Under the new rules if you have excessive surplus income, your bankruptcy is automatically extended for an extra year, so many Canadians rushed to file under the old rules (so their bankruptcy would be quicker and cheaper). The new rules caused a drop in personal bankruptcies in the last quarter of the year, but as the chart shows, consumer proposals continued to increase.

The increase in consumer proposals will continue to be the story in 2010. Canadian debtors will avoid bankruptcy where possible, and instead file a consumer proposal. From 2006 through 2008 there were approximately four bankruptcies filed for every consumer proposal filed. In 2010 we expect the ratio to be only two personal bankruptcies for every consumer proposal. That’s a significant change.

If you have debt, the good news is that consumer proposals are now more popular than ever before, so you now have a way to deal with your debts and avoid bankruptcy. In a consumer proposal your unsecured creditors (like credit cards, lines of credit, bank loans, payday loans, and income taxes) are contacted with a deal. The deal generally involves you paying less than the full amount you owe. For example, if you have $50,000 in debts, the creditors may agree to a proposal where you pay $20,000, or $400 per month for 50 months. They may ask for more (say $400 per month for five years), or they may settle for less. The exact amounts will depend on your family income, your ability to pay, and what assets you own. Consult a licensed consumer proposal administrator for more information.

What will happen in 2010? If the unemployment remains high, personal bankruptcy and consumer proposal filings will remain high. If interest rates increase, and the cost of servicing debt increases, insolvency filings will also increase.

Our advice is to not worry about that which you cannot control. What happens with the economy is out of our hands. However, we do control our own debt, so if you are carrying more debt than you can handle, and if you are worried about job loss or reduced income, we strongly recommend that you contact a licensed trustee for a free initial consultation to determine your options, and do what you can to avoid becoming another statistic.

Posted on Monday, March 8th, 2010
Filed under: bankruptcy Canada andbankruptcy reform andConsumer Proposal
posted by Doug Hoyes @ 6:05 am No Comments

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

Massive Increase in the Personal Bankruptcy Rate in Canada: Why, and What’s Next?

by Doug Hoyes

Bankruptcy Canada Statistics - September 2007, 2008, 2009

Bankruptcy Canada Statistics - September 2007, 2008, 2009

The personal bankruptcy rate in Canada had a huge upward spike in September, 2009, according to numbers released by the Office of the Superintendent of Bankruptcy. In the month of September 12,305 Canadians filed personal bankruptcy, which is an astounding 47% increase over the 8,347 who filed in September 2008. In addition there were 3,160 consumer proposals filed, for an increase of 38% from last September.

In the twelve months ended September 30, 2009 Canadians filed 116,295 personal bankruptcies, and 32,083 proposals, so in total 148,373 Canadians have declared themselves insolvent in the last twelve months.

That’s an amazing number. A review of past personal bankruptcy statistics in Canada shows that for the last few years the total insolvency rate in Canada has hovered around the 100,000 level, so to have almost 150,000 filings in the last twelve months proves that more Canadians than ever are experiencing severe financial problems.

The most worrisome numbers are the trends. Over the last twelve months personal bankruptcies in Canada have increased by 36%. In the last three months they are up by 41%. In the last month they are up by 47%. Those ever-increasing numbers show that the financial problems of many Canadians are getting worse, not better.

Why is the Personal Bankruptcy Rate in Canada Increasing?

There are a number of explanations for the massive increase in the personal bankruptcy rate in Canada.

First, Canadians are carry more debt than ever before. The greater your debt, the harder it is to service, and therefore the more likely you are to get into financial trouble.

Second, the unemployment rate in Canada continues to increase. Back during the boom years of 2005, 2006 and 2007 incomes were high, and there was lots of overtime, so it was possible to service high levels of debt. Canadians bought houses, cars and consumer goods on credit. But, when the recession started in 2008 and incomes started to fall, it became impossible for many Canadians to continue making their monthly debt payments.

Finally, as our readers are well aware, on September 18, 2009 new bankruptcy rules were implemented, making bankruptcy for many more expensive, as discussed in our posting on the insanity of the new bankruptcy Canada rules. So, as predicted, in the week or two leading up to September 18, many Canadians rushed to file bankruptcy before the rules changed. This rush to file mad bad September numbers look even worse.

Will the Bankruptcy Rate in Canada Continue to Increase?

We have all heard the old joke that economists have predicted 15 of the last 10 recessions, so no one knows for sure if the recession will soon be over. It would appear that as long as the unemployment rate remains high, and consumer spending remains moderate, high debt levels will lead to a continued high number of bankruptcies.

There is, however, one new trend emerging from the new rules: an increase in the percentage of consumer proposal filings. A consumer proposal is an alternative to bankruptcy, and now that many bankruptcies are more expensive, more people will choose to file a consumer proposal as a bankruptcy alternative. Here’s why: under the old rules, even with surplus income it was possible for a bankruptcy to end in nine months. Under the new rules, if you have, on average, more than $200 per month of surplus income, your bankruptcy will last for 21 months (or in the case of a second bankruptcy, 36 months). If your surplus income payment is $400 per month, the cost of your bankruptcy just went from $400 x 9 months to at least $400 x 21 months. Many people decide that instead of paying $400 for 21 months, they will offer a consumer proposal of $200 per month for 48 months. They end up paying more, which makes the creditors happy, but they also find that a $200 per month payment is more affordable than paying $400 per month.

In the twelve months ended September 30, 2009 21.6% of all filings were consumer proposals. That’s exactly the same percentage for the twelve months ended September 30, 2008. For the month of September, 2009 that percentage dropped to 20.4% due to the spike in bankruptcies, but it’s likely that the percentage of proposals filed will probably approach 25%, or more, over the next year as debtors seek to avoid the sometimes punitive costs of a bankruptcy by filing a consumer proposal.

Our advice to debtors: you are not alone, and the rules have changed; expert assistance is required to determine which option is right for you, so consult a trustee in bankruptcy licensed by the federal government to ensure you understand the implications of deciding to file a proposal or bankruptcy.

Posted on Monday, November 23rd, 2009
Filed under: Bankruptcy Alternatives andbankruptcy Canada andbankruptcy reform andConsumer Proposal
posted by Doug Hoyes @ 6:43 am No Comments

Is it the economy that is driving the increase in bankruptcies and proposals across Canada?

by Barton Goth

The Office of the Superintendent of Bankruptcy recently released statistics showing that in April 2009, when compared with the same month in 2008, Canadian insolvencies increased by 32.2%!

Barton Goth, Bankruptcy TrusteeWhy the big increase?  Is it due to the downturn in the economy, or is there something else that we need to be worried about?  Clearly the economy has played a major role; to date we have experienced a major downturn in all economic indicators, including real GDP, and the unemployment rate, just to name a few.

Could it be due to the current state of our family finances? This topic has been overlooked in the press, but it is a driving force behind our economy at large. Unfortunately, due to the increased availability of credit over the last 50 years, we have turned from a society who had access to credit, to a society who is absolutely dependent on credit.

Every year, Roger Suave, a renowned statistician, analyzes the financial position of the typical household in The Current State of Family Finances for the Vanier Institute.  In his most recent report on The State of Family Finances he has identified some alarming trends.  :

  • The average household debt is greater than $90,000.
  • The total debt to disposable income ratio has increased to 140% for 2008.
  • The ratio of consumer debt plus mortgage debt climbed to 127% of disposable income in 2008 – the Canadian rate is only 3% lower than the US rate. This ratio is now above what the US rate was in 2006, just before the bubble burst.
  • Spending and debt have risen much faster than incomes – The average household income rose to $65,200 in 2008 and was up by 11.6% since 1990. Spending increased twice as fast (+24.4%) over the same period while total debt (+71%) increased more than six times faster than incomes.
  • Annual savings are smaller and average net worth is also less.

The Certified General Accountants Association of Canada recently published the results of a survey they had conducted in order to shed light on the household debt of our Canadian Families Where Has the Money Gone: The State of Canadian Household Debt in a Stumbling Economy.

Their key findings are very similar:

  • Household debt reached a record high of $1.3 trillion in 2008 and these debts are primarily used to pay for consumption not assets.
  • Canadian households are increasingly using money they have not earned (credit) to finance day-to-day living expenses.
  • When asked for the main cause of their increasing debt, 58% identified day-to-day living expenses. This was up from 52% in 2007.
  • 85% of Canadians with debt owe money on a credit card. Lines of credit and credit cards were the main sources of consumer debt.
  • 84% of Canadians are worried about increased debt. 21% feel that they are not able to manage their debt load.
  • 65% agreed that debt prevents them from being successfully prepared for retirement, education, leisure and travel, or financial security in \unexpected circumstances.
  • One third of Canadians do not save money. Historically, people start to save more when there is a downturn in the economy, but this time, there is no evidence of increased savings.
  • 25% of Canadians would not be able to handle a $5000 emergency, even with credit cards and lines of credits, and 1 in 10 would be unable to deal with an unforeseen expense of $500.
  • And most interesting of all – 78% of those surveyed said they would not change their saving patterns in order to build or rebuild their financial cushion.

If Canadian families are not willing to change, where will this pattern end?

Roger Suave clearly states that we are in a recession. He reminds us of how significantly families are impacted by the previous two recessions.

  • Jobs lost in each recession: about 350,000 — After the 1990’s recession, it took five years for the number of jobs to return to the 1990 level.
  • Average household incomes dropped in the last recession by $3,800 — Income levels did not recover for 10 years
  • Record poverty rate reached in last recession – Rate in the nineties did not recover for 11 years
  • Twice the number of Insolvencies

As you can see there is tremendous economic pressure. Many families are currently stressed, and many more families will likely be experiencing these same pressures in the near future.  While we aren’t going to be able to change these trends overnight, we must first recognize how much economic pressure families are under and then do our part to reduce our family’s reliance on debt.

While many of us may be able to make some small revisions in the way we spend, others may be too far in to be able to do it themselves.  If you can do it yourself, do it now. If you need help, meet with a credit counsellor or a licensed trustee to explore your options. Start now – we can improve the economy of the country by increasing the financial health of Canada’s families.

Written by Barton Goth, Trustee in Bankruptcy.

Posted on Monday, August 10th, 2009
Filed under: bankruptcy Canada
posted by Barton Goth @ 8:00 am No Comments