On July 14, 2011 the Supreme Court of Canada released its decision in the case of Schreyer v. Schreyer. Why are we discussing a Supreme Court of Canada decision in a blog about bankruptcy in Canada? Because this case confirms a long held principle of bankruptcy law, but it also forces us to consider whether changes to bankruptcy law are required.
Mr. and Mrs. Schreyer divorced in 1999, and as is standard procedure, their assets were to be divided amongst them. Mr. Schreyer was to make an equalization payment to Mrs. Schreyer of about $41,000.
Where both parties own assets, and one of the parties will be retaining one of the assets, that party pays the other their share.
For example, if the wife’s only asset are shares in a business worth $100,000, and the husband has no assets, upon divorce the wife may be required to make an equalization payment of $50,000 to the husband. By doing so, after the divorce, they both end up with $50,000 in assets, so they each have half of the total assets they had while married.
In the case of Schreyer v. Schreyer the asset was a family farm, and Mr. Schreyer was ordered to pay $41,000 as an equalization payment to his wife.
However, before that payment was made, Mr. Schreyer declared bankruptcy. Mrs. Schreyer therefore became a creditor of his in his bankruptcy. Under Manitoba’s The Judgments Act, the family farm was exempt from execution by creditors. That meant that Mr. Schreyer kept the farm when he went bankrupt, and his wife got nothing.
(It should be noted that the law is different in each province. For example, in Ontario there is no exemption for real estate, so in Ontario if the bankrupt owned a farm worth $80,000, the trustee may sell the farm and distribute the proceeds to the creditors, so had this happened in Ontario, Mr. Schreyer would have lost the farm when he went bankrupt, or he would have been required to pay into his estate the value of the farm).
Is this fair?
According to bankruptcy law, your debts are extinguished when you go bankrupt, so on that basis yes, it’s fair.
However, the Bankruptcy & Insolvency Act does give special treatment for child support, in section 178 (1) (c), which states that the following debt or obligation is not discharged in a bankruptcy:
any debt or liability arising under a judicial decision establishing affiliation or respecting support or maintenance, or under an agreement for maintenance and support of a spouse, former spouse, former common-law partner or child living apart from the bankrupt;
In other words, if you go bankrupt, you are still required to pay child and spousal support.
So, why, if you file bankruptcy in Canada, are you not required to make equalization payments to your former spouse? That’s a good question, and I suspect that the law will be changed to close this loophole; it’s certainly received a lot of press since the decision was released, including these articles:
Parliament moves slowly, so we shall see how long it takes for the government to act. Regardless of their speed, I believe that it is time for the government to change the rules regarding divorce and bankruptcy.
On this Trustees Talk site we attempt to comment on items in the news, and items of interest to Canadians. As we have discussed previously, in June 2010, the Office of the Superintendent of Bankruptcy (OSB) initiated a Review of the Trustee Licensing Regulatory Framework . One of the items up for discussion was whether or not credit counsellors should be permitted to act as consumer proposal administrators.
On June 28 we published the thoughts of a trustee from Edmonton, Barton Goth, who asked the question: Consumer Proposals: A need for more administrators or a slippery slope? He concluded that the expertise of a licensed trustee is very valuable to anyone in financial trouble. While credit counsellors offer debt management plans, a consumer proposal is a legally binding, court approved procedure, so a higher standard of care is required.
We have reported on Debt Management Plans, and we encourage everyone to “run the numbers” to determine if you are using the proper solution to deal with your debt problems.
CACCS mistakenly refers to the trustee community operating as a monopoly; with 1,017 practicing trustees in Canada competing for work, nothing could be further from the truth. In essence the position of CACCS is analogous to a position that dentists have a monopoly over fixing teeth and surgeons have a monopoly over performing surgery, again these are not monopolies, but regulated (or self-regulated) professions, with a goal to have the most qualified professional provide the service to achieve the most desirable and predictable result. The dentist, surgeon and trustee all fit into this category;
CACCS mistakenly believes there is an access constraint within the consumer debtor market that fundamentally must be addressed by adding capacity. The issue, however, is not capacity, but quality; currently only trustees embody the depth of knowledge, breadth of experience and professional standards to meet the needs of consumer debtors within a Court-supervised restructuring process. As for capacity, we are dumbfounded by this CACCS assertion given that the economy has just experienced the worst economic downturn since the Depression and yet no consumer debtor went without access to a trustee to meet their needs through the provision of quality services;
CACCS asserts that its members are uniquely qualified to service the consumer debtor market. The very principle of a profession is that the individuals within it maintain a distinct expertise that allows them to perform a service to benefit an individual or entity—a service that is superior to that offered by all other providers. In the case of consumer debtors, it is trustees who have proven their ability based on depth of knowledge, breadth of experience, adherence to strict standards and oversight and ability to deliver a complete suite of services that differentiates them as the market leader in servicing the needs of financially distressed Canadians;
CACCS asserts that Debt Management Plans (DMP) and consumer proposals have many of the same characteristics. The truth is that DMP and consumer proposals are more dissimilar than similar. DMP are not Court-supervised restructuring proceedings; they do not require an administrator to balance the competing interests of the stakeholders; they do not require the administrator to opine on the reasonability of the Plan; they do not require an assessment of realization under alternative proceedings; they do not require consideration of all aspects of the Bankruptcy and Insolvency Act, provincial legislation, jurisprudence and, most importantly, professional judgment; and they are not subject to regulatory oversight by the OSB and supervision of the Court; nor are the administrators subject to the strict standards of professional practice, code of conduct and by-laws of CAIRP. Are they the same – not really!
CACCS believes that the consumer debtor is a client for the purpose of a consumer proposal, in which CACCS articulates a role for negotiation with creditors based on a client’s ability to repay their debt, according to their situation and the best of their ability. Unfortunately, CACCS fundamentally misunderstands the role of an Officer of the Court, a trustee, and the conceptual requirements of the BIA, that while preserving the principles of rehabilitation and a fresh start for the consumer debtor, must also respect the responsibility of the consumer debtor to his or her creditors. The role of the trustee is complex, as it requires a balancing of the competing interests to achieve equity through the facilitation of an arrangement between a consumer debtor and his or her creditors, having regard to the personal circumstances of the consumer debtor. Is the fundamental mindshift easy? No. Is it a requirement? Absolutely.
CACCS asserts that, by granting credit counsellors status as administrators of consumer proposals, the current referral system between credit counsellors and trustees will be unnecessary in the future. CACCS asserts that such a referral stream is “problematic and very inefficient while presenting a major disservice to the Client. Specifically, once the Client’s trust has been gained and the clinical relationship has formed”. CAIRP asserts that the referral system remains a necessary and important aspect of the insolvency process, irrespective of the status of creditor counsellors to provide consumer proposal services. The assertion lacks situational recognition that consumer proposals are not the answer for all financially distressed individuals; it fails to recognize that the seeds of success are not embedded within every consumer proposal filed; it fails to recognize that client referrals from trustees to credit counsellors should be equally common based on an assessment of an individual’s personal circumstances; it fails to recognize that specialized counselling may be required to meet a consumer debtor’s needs, counselling beyond the ability of a trustee or a credit counsellor. CAIRP is concerned, based on the assertion of CACCS, that its members will see the consumer proposal legislation as the sole alternative to a DMP. Is the real risk referrals? No, it is practitioner perception; and
CACCS presents survey results that are at best self-serving, at worst libelous. The survey makes bold statements pertaining to trustees failing to meet their statutory duties in performing adequate assessments (in accordance with Directive 6R3). The survey presents a tainted picture, but lacks transparency and substantive and objective correlation between the methodology and results; it lacks any source reference or verifiable basis on which to conclude whether any comments are substantively supportable. It is the position of CAIRP that the entirety of the survey results is inappropriate for a public consultation by the OSB as to the Licensing framework. CAIRP will in the coming weeks hold CACCS to account.
Wow. Sounds like a war of words between CAIRP (the trustees) and CACCS (the credit counsellors).
I have already provided my thoughts on this issue, so I will not belabor the point further here, other than to say this: if you are experiencing financial trouble, who do you want to assist you? If you want a credit counsellor working for a not for profit credit counselling agency, then see a credit counsellor. If you want a consumer proposal administrator or a bankruptcy trustee, go see them. You have the choice.
I work with many excellent credit counsellors, and I regularly refer people to credit counsellors when I believe they are best able to provide a solution. In many cases a credit counsellor can provide a solution; in other cases a bankruptcy trustee’s services are required. I pride myself on always looking out for the best interests of the people who seek my help. If all advisors (trustees, credit counsellors, lawyers, accountants) focus on providing advice that is in the best interests of the person in debt, everyone will get the professional assistance they deserve.
Personal bankruptcy filings in Canada increased in June, 2010, according to personal bankruptcy statistics released by the Office of the Superintendent of Bankruptcy. In the month of June 11,900 Canadians filed a bankruptcy or a proposal, up 7% from the 11,123 filings in May, 2010. Over the twelve months ending in June, 145,233 residents of Canada filed a proposal or bankruptcy, up 6.2% from the 136,749 who filed over the twelve months ending in June, 2009.
For the twelve months ended June 2010 the rate of filings increased everywhere but in Manitoba and Nunavut. Here’s a summary of the rate of increase in personal insolvencies (which includes bankruptcies and proposals) filed by consumers in Canada for the twelve months ended June, 2010:
What does the increase in insolvency filings in Canada mean for the average Canadian?
A quick review of the number shows that in virtually every province the number of insolvencies filed increased, but a more detailed look at the number reveals a very important trend: personal bankruptcy filings in Canada are actually decreasing, while the number of consumer proposals filed is increasing dramatically.
As noted above, over the last twelve months in Canada the total number of residents of Canada declaring insolvency increased by 6.2%, to 145,233. However, the number of personal bankruptcies actually decreased by 1.5%, from 106,933 to 105,360. So why are total filings up 6.2%? Because the number of proposals filed by consumers increased by an astounding 33.7%, from 29,816 to 39,873 filings in the last twelve months.
These numbers prove that the average Canadian is increasingly choosing to file a consumer proposal as an alternative to personal bankruptcy.
Why are consumer proposal filings increasing in Canada?
Bankruptcy numbers are falling, and consumer proposals are increasing for two reasons:
First, the economy in Canada is still showing weakness, which is why overall numbers are still increasing.
Second, and most importantly, in September 2009 the federal government implemented new bankruptcy rules that make filing bankruptcy a longer and more expensive process for many Canadians. The most significant new rule involves the calculation of surplus income. In simple terms, under the new surplus income and bankruptcy in Canada rules, if your family income is higher than the allowable limit set by the government, your bankruptcy will last for an extra year, and you will be required to make extra payments for that extra year. That means that a first time bankrupt, instead of being discharged in nine months, may not be discharged for 21 months.
Clearly, many Canadians with debt problems have analyzed their options, and have decided that a consumer proposal is a better option than bankruptcy for dealing with their debts, and that’s why consumer proposal numbers continue to increase.
With a consumer proposal you make one fixed monthly payment, and that payment doesn’t increase even if your income increases. You know exactly what you are required to pay to discharge your debts, and that’s a great feeling.
In June 2010, the Office of the Superintendent of Bankruptcy (OSB) initiated a In June 2010, the Office of the Superintendent of Bankruptcy (OSB) initiated a Review of the Trustee Licensing Regulatory Framework . First a little bit of background: the OSB is a division of the Federal Government who has been charged with the administration of all estates and matters to which the Bankruptcy and Insolvency Act. Their main role is “to maintain investor and lender confidence in the Canadian marketplace by protecting the integrity of the bankruptcy and insolvency system.” As a result they play a crucial role in many areas, including the review of Trustees’ and debtors’ actions in all aspects of bankruptcy, reviewing the performances of official receivers and senior bankruptcy analysts, and the issuing or renewal of Trustee licenses.
Barton Goth, Bankruptcy Trustee
While most of this review is pretty bland, there is one item being considered that could have some dramatic ramifications on the Canadian Insolvency industry as we know it. That is the issue of whether non-trustees should be able to serve as administrators of consumer proposals. For those of you who are not aware, a consumer proposal is mechanism within the Bankruptcy and Insolvency Act that provides a legally binding way for debtors to negotiate a settlement with their creditors and avoid a bankruptcy. It is a win-win as the debtor is permitted a mechanism where they can avoid a bankruptcy and the creditors in turn receive a greater recovery than that would under bankruptcy. Currently all consumer proposal administrators in Canada are licensed bankruptcy trustees.
The question that has been raised is whether or not the OSB should appoint or designate administrators of consumer proposals who are not licensed trustees.
As you can imagine, being a licensed trustee here in Edmonton, Alberta , I have some strong opinions on this issue. To be clear I don’t think it is a good idea and I see this as a very dangerous path.
One vital requirement of administering a consumer proposal is that it requires a thorough assessment of each individual debtor, and to be able to conduct a proper assessment you must be well versed in all aspects of the Bankruptcy & Insolvency Act, the Income Tax Act and other relevant provincial legislation. This is no small task and one that takes a significant amount of training to be able to do appropriately, training that is largely what the Trustee licensing process is designed to do.
There are other reasons that I am nervous about this potential change in policy, but what I want to specifically address were 3 issues identified in the OSB’s consultation paper. Although, I did find it interesting that unlike the other changes being considered there was no real background or justification in this paper as to why the administration of consumer proposals was becoming an issue. The only section that addressed this potential change referenced an argument made by In February 2008 by the Ontario Association of Credit Counselling Services (OACCS) when they appeared before the Standing Senate Committee on Banking Trade and Commerce.
The three of the main reasons advanced by the OACCS to be appointed as administrators were:
1. Availability
By expanding the ability to administer consumer proposals outside the trustee community it would allow for the availability of a credible alternative to Canadians for unbiased advice and consumer choice related to consumer proposals;
2. Diminishing Revenues
It would help to create an additional revenue stream, a revenue stream that was adversely impacted by the OSB’s issuance of a position paper issued by the OSB entitled “Referral Agreements between Trustees and a Third Party.” For reference, this position paper was put forward as there were many of largest of the credit counseling who were regularly preparing files for consumer proposals and acting as agents for certain trustees in a manner that contravened the intent of the Bankruptcy and Insolvency Act.
3. Serve to correct the current monopolistic approach taken by the OSB that that limits access to the consumer proposal option for those in need. Here are my comments:
1. Availability
Regarding their first point, that of availability of a credible alternative for unbiased advice. I see three components of this issue: knowledge, access and any potential biases. The first question I have is are people aware of what a consumer proposal is? Is the knowledge out there among the various stakeholders? Well clearly the trustee community and most reputable credit counselors are familiar with the general concepts behind a consumer proposal. There is nothing that prevents a credit counselor from discussing the existence of this option with a consumer debtor, just as there is nothing preventing me from discussing the presence of debt management plans or the like with people who walk in my office. Now do these discussions happen? Are the credit counselors accurately informing those they meet with? While I live in Alberta and can’t speak to what happens in Ontario or other areas of the province, I know where I practice, they are. The trustees and credit counselors here in Alberta have a good working relationship, and it is not uncommon for us to refer clients back and forth depending on their needs. So from my stand point, knowledge isn’t the issue.
The second component of this discussion is access. Is access an issue? Are consumers having difficulty meeting with a licensed trustee to discuss the filing of a consumer proposal ? Currently, I would say no, access is a non-issue. I have never run into someone who was unable to arrange a time discuss the filing of a consumer proposal with a licensed trustee or even suggested anything similar. Now, over the long term, I can see this as a potential argument. Just like society in general, we are all facing a mass baby boom retirement. This mass retirement has the potential to bring a host of economic and social difficulties that we will all be forced to deal with. The key is that this is a societal challenge, not simply a challenge that the trustee community is going to have to address. Arguably, this same phenomenon will impact accounts, lawyers, doctors, teachers and, I would assume, credit counselors. The result is that the average professional, including trustee’s and credit counselors, are going to have to take a close look at how we manage our practice’s, take greater advantage of the areas we are able to delegate and investigate ways that technology may be able to help us realize efficiencies that weren’t available historically. But this is not unique to our demographic. So I agree there is a challenge, but watering down the requirements to administer will potentially result in making it more difficult to find a qualified credit counselor, assuming there are fewer of them to manage the existing pool of debtors and the credit counselor is in turn have less time to do so, as they would now have to worry about all the issues associated with administering consumer proposalss and managing the related trust accounts.
The third point was that of a potential bias. Clearly there is a potential bias among the trustee community: we can administer proposals so it can very easily be suggested that the advice we give may be colored as a result of what services we can offer. Unfortunately, this potential bias is very difficult to overcome. However, one of the best ways to deal with this potential bias is to ensure that there is a lengthy and rigorous training requirement with an emphasis on professionalism and ethics. In addition, it is important that all efforts are made throughout this training requirement to look into the character of the potential candidate, whether this be through reference checks, an interview requirement, or, even better, a mandated experience requirement that involves being directly mentored by a licensed professional who is committed to the integrity of the profession. This does two things, first it helps to ensure that the potential candidates will be of the highest quality. Second, because people have sacrificed a large amount of time and energy in obtaining the certification the threat of losing that certification has significant weight. Interestingly enough, this is exactly model that trustee licensing process follows and while I am not going to argue that this process is perfect, it goes a long way to ensuring that the people administering proposals are capable, committed and willing to uphold the same principles and values that insolvency system is based.
In reality, this potential bias is going to exist regardless of who is administering proposals. If the ability to administer a consumer proposal is extended to include people outside the trustee community, these new designates are immediately going to be inherently at risk of holding that very same bias. Furthermore, this new group of designates has not been put through as rigorous of a training process and may not have as much respect for the insolvency system. The threat of losing their license may not have as much weight. As a result, I see a very slippery slope that may result in a much less consistent administration of proposals.
2. Diminishing Revenues
I was surprised this was used as an argument. Let me give you a little background so you can appreciate where I am coming from. As a licensed trustee what we do is directed by the legislation, directives issued by the Office of the Superintendent of Bankruptcy and how the courts have interpreted the both of these. If we look at the rules laid out by the above sources, we see there has been very clear direction given about referral agreements between Trustees and third parties. It is very clear that only Trustees are licensed to administer Consumer Proposals, and that this function cannot be delegated or outsourced.
There are four distinct sections of the Bankruptcy & Insolvency Act that are identified by the Office of the Superintendent of Bankruptcy.
Rule 49. Trustees shall not, directly or indirectly, pay to a third party a commission, compensation or other benefit in order to obtain a professional engagement or accept, directly or indirectly from a third party, a commission, compensation or other benefit for referring work relating to a professional engagement.
Rule 44. Trustees who are acting with respect to any professional engagement shall avoid any influence, interest or relationship that impairs, or appears in the opinion of an informed person to impair, their professional judgment.
Rule 47. Trustees shall not engage in any business or occupation that would compromise their ability to perform any professional engagement or that would jeopardize their integrity, independence or competence.
Rule 50. Trustees shall not obtain, solicit or conduct any engagement that would discredit their profession or jeopardize the integrity of the bankruptcy and insolvency process.
OACCS is saying that their revenue is being diminished as a results of no longer being able to participate in consumer proposals, but they have never had the power to do so. As I read these three rules, I must agree with the Office of the Superintendent that referral agreements entered into by trustees in bankruptcy and other parties are contrary to the BIA and its rules. In cases where such agreements existed, neither the trustees nor the credit counselors involved were acting in an acceptable manner, as was clarified in a position paper by the OSB. So whether or not the enforcement of these principles had a detrimental impact on the revenues of the credit counseling agents is immaterial – it should never have been done. Arguing that revenue is being lost because they can’t do what they never had the right to do in the first place is not a logical reason to extend the right to be involved to a group who already has a record of crossing the line of what is considered acceptable.
3. Monopolistic Approach
The third argument presented is that of a monopolistic approach that limits access to consumer proposals. Now I have already commented on the limited access argument, but the monopolistic approach I find somewhat intriguing. I must admit, I don’t see a monopoly. The definition of a monopoly is when one company has exclusive rights to offer s specific service, and from the statistics presented by the OSB in their position paper in 2008 there were 253 firms operating under a corporate license and 28 practicing without a corporate license – hardly a monopoly. This is like saying that doctors or lawyers have a monopoly, and again just doesn’t make sense. There are no restrictions on the number of trustees able to operate, the number of firms allowed per region – the emphasis is on being qualified.
Conclusion
As you can see, I don’t agree with the arguments supporting change to the administration of consumer proposals. To be involved in any insolvency related engagement, you need to be properly trained and properly qualified, and I am not in support of any sort of streamlining or watering-down of our industry. While I can appreciate that many files are straight forward, whether or not it is a bankruptcy, a consumer proposal or a receivership, the problem is that the potential exists for significant complication in every file, and these complications are not always obvious at the outset. Whether this is a significant change in financial circumstances, an undisclosed asset or allegations of fraudulent misrepresentation or the need to have a specific claim adjudicated on by the court, the possibilities for complexities are immense, and a firm grasp of the legislation and procedures is necessary to be involved in any level of these administrations.
Having said that, I am sympathetic to the plight of our credit counseling colleagues and the efforts they are making to expand their industry. Credit counselors play a crucial role and add value to our industry as a whole, as they serve a growing segment of the market place that needs their help.
The challenge is really how credit counselors can expand their revenue stream. While I have heard of a number of models (i.e. the expanding of the credit counseling component required in any consumer proposal or bankruptcy) and many of those alternative models have merit, I think that OACCS may want to look to what is being done in Alberta. In Alberta, as a province, we have chosen to opt into Part X of the BIA. For those unaware of what is contained in this section of the Act, it discusses the Http://www.bankruptcy-edmonton.com/orderly-payment-of-debts-in-alberta.htm program (OPD).
The OPD program is much like a debt management plan, a familiar concept in the credit counseling community. But there is one big difference – the OPD program is court-sanctioned. The credit counselor makes an application through the court system for a consolation order, and with this consolidation order there is an automatic stay of proceedings that puts an immediate stop to any collection activity that creditors are currently taking. This is the same type of court protection that is in place with a consumer proposal or an bankruptcy. The advantage of this is that credit counselors in other provinces would be given one more tool in their arsenal, a tool that gives them a very significant ability to stop garnishment, creditor harassment and the like. More importantly I believe this serves the public good as it provides another option for the consumer.
This is an approach that has been successfully taken by the credit counselors who practice in Alberta, and not only has it proved to be a successful way for the credit counselors to expand their product offering and derive additional revenues, it is an option that is very beneficial to consumers. I am pleased that this is the approach that has been taken here in Alberta, and I regularly refer debtors to credit counselors who provide this service. I find it is a unique product offering that fits in between consolidation loans and consumer proposals and more importantly it is a way that we can address some of the issues identified by OACCS but at the same time serves the public good by benefitting all the stakeholders involved.
The Office of the Superintendent of Bankruptcy (“OSB”) is currently conducting a policy review. One topic they are considering is whether or not they should implement specialized licenses for bankruptcy trustees. Currently all bankruptcy trustees in Canada must go through a very rigorous educational program. Most trustees have a university degree, many have an accounting background, and all are required to pass five levels of courses (with each level taking approximately one year to complete), culminating with a final one and a half hour oral exam. All trustees must have a breadth of knowledge, and must understand both personal and commercial insolvency issues. The OSB is now considering graduated licenses: consumer insolvency only, commercial only, and proposal administrators. Frankly, I’m concerned that these potential changes are being actively considered.
We operate a consumer bankruptcy practice in central and southwestern Ontario. You might think that we would be pleased to see consumer licenses and proposal administrator licenses issued as these would cover 90% of our practice. We’re not – our concern focuses on the fact that there are very few sections of the Bankruptcy and Insolvency Act (“Act”) that persons operating our type of practice do not need to “know”.
I will concede that there are not many personal bankruptcy estates that have to deal with complicated commercial issues like commercial leases, or 30 day goods, or the Wage Earner Protection Program. Having made that concession, these issues do arise and the trustee on the file needs to be knowledgeable and experienced enough to deal with the “unexpected”. If the OSB intends to issue limited scope licenses then a policy needs to be developed to deal with estates that develop into types that the specialized trustee has not been licensed to handle. It is not difficult to imagine an estate that starts out quite simple and straightforward that somehow transforms itself into a highly technical, highly complicated file. A self employed person, or someone involved in a legal dispute prior to filing are two possible candidates for this type of transition.
Further, the assessment requirements currently set out in the Act require the trustee performing the assessment to present a debtor with all of their alternatives. If a person with a specialized license doesn’t’t have a good working knowledge of all aspects of the Act they will not be able to comply with this requirement. If they cannot comply with the assessment requirement debtors may be counseled into the “wrong” solution for them.
My concerns thus far seem to deal with personal insolvencies – what about issuing limited commercial licenses? In my experience the level of general knowledge about the Act is higher for those trustees working in the personal insolvency area. This is based on my experience hiring and training trustees and students with commercial and consumer backgrounds. The consumer practice requires a much broader understanding of the Act. The law is the same for both types of files – the difference seems to be on the volume of estates. A consumer practice is often a volume business – it is therefore more likely you will encounter more unusual situations. A commercial file is almost always larger and more complicated, but in the most complicated commercial files a trustee is not working alone – they have other professionals, including other trustees and lawyers, that they can call on for assistance.
I would not object to specializations once a trustee license has been granted. In other words, if after someone has demonstrated the knowledge and skills to be licensed as a trustee and they decide to limit their practice to certain types of insolvencies, they may do so. Of course they may already do so simply be restricting the types of files they accept.
If the purpose of these specialized licenses is to make it easier to obtain a trustee license then I have to question the wisdom of such a course. At a time when the world is becoming more complicated, why would you simplify the requirements to deal with complicated financial situations? If the OSB is anticipating a shortage of trustees then the correct solution is not to make it easier to become a trustee, the correct solution is to make it more attractive to obtain a license. The market will then correct for any shortfall.
In short, I don’t support the idea of specialized licenses, in particular if the goal is simply to create more trustees. There are better ways to achieve that goal, if that is the true objective of this policy.
If simplified, specialized licenses were to be created, my top ten predictions for what will happen if specialized consumer proposal licenses are issued by the OSB are as follows:
1) The number of persons applying for these specialized licenses will exceed the number of persons pursuing a full trustee in bankruptcy licence (why pursue a full licence when you can obtain a licence to provide the most lucrative services that trustees provide).
2) Over time the number of fully licensed trustees will diminish to the point that there will be serious access to service issues for anyone requiring the services of a full trustee.
3) Dollars spent on advertising “debt relief without filing bankruptcy” will increase dramatically. The total number of insolvency filings will increase. Initially the number of consumer proposal filings will increase, but within a few years bankruptcy filings (assuming people can find a full trustee) will also increase as proposals fail.
4) Credit losses will increase – persons that might not previously have considered a proposal will be enticed by the less emotionally charged services of a proposal administrator as opposed to a trustee (there are in fact trustees now advertising themselves as proposal administrators for this very reason).
5) Abuses currently in evidence from non-regulated “debt consultants” will now become muddied with these non-trustee proposal providers.
6) Many debt consultants may attempt to obtain these specialized licenses not fully a appreciating (or intending to provide) the level of service and control that holding funds in trust requires.
7) Failures of these new limited service providers will erode the publics’ trust in the system – currently the insolvency industry is not well known or understood; in the future these failures will display the industry in a less than favorable light.
The not for profits currently providing debt management solutions will either fold or become proposal administrators, effectively removing one form of debt relief from the market.
9) Unless specifically prohibited, law firms may move into this service area just as they have moved into collection activities, further confusing the public.
10) OSB resources will not be sufficient to properly monitor and control the persons and firms providing these proposal only services.
In summary, I strongly believe that debtors experiencing debt problems should have access to advice from well educated and highly experienced professionals. Would you rather see a doctor that went to medical school for one year, or a doctor with five years of additional training and many more years of practical experience? Personally, I would prefer to deal with the most knowledgeable professional possible, and so I believe that granting fully qualified licenses to trustees is the best interests of the public.
The Office of Superintendent of Bankruptcy is a special operating agency associated with Industry Canada, part of the federal government. The “OSB” regulates bankruptcy trustees (the people who administer bankruptcies and proposals, and ensure they comply with all aspects of the Bankruptcy and Insolvency Act). As the regulator, the OSB will often seek the input of various stakeholders to determine if changes to their regulations of trustees are required, and they have just announced a “Trustee Licensing Consultation” to review various aspects of insolvency regulation in Canada.
One of the items being considered is whether or not to allow non-trustees to serve as administrators of consumer proposals. As our regular readers will be aware, a consumer proposal is a legally binding settlement negotiated between a debtor and their creditors, with the assistance of a consumer proposal administrator. With the exception of the province of Nova Scotia, where provincial representatives may administer consumer proposals, all consumer proposal administrators in Canada are licensed bankruptcy trustees.
The issue being considered is this: should the OSB allow non-trustees to serve as administrators of consumer proposals?
Ms. Ross presented the argument that accredited credit counsellors (in addition to licensed trustees) should also be permitted to administer consumer proposals. She gave three main reasons:
To eliminate the “monopolistic approach that limits access to the consumer proposal”, since only licensed trustees can act as administrators;
To “provide Canadians with equality of access”; and
To increase OACCS member agencies revenue to allow them to provide their other services.
What’s my opinion?
First, let me start by stating my bias: I am a licensed bankruptcy trustee, and my firm files many thousands of bankruptcies and consumer proposals each year, so obviously I have a vested interest in maintaining the status quo; it’s what I do for a living.
Second, let me also say that I have personally met Ms. Ross on a number of occasions, and I have a great deal of respect and admiration for her, and for her organization. On a daily basis I interact with many credit counsellors who work at OACCS member agencies. I refer debtors to credit counsellors when I believe a credit counsellor can best solve their problems, and I refer debtors to OACCS member agencies for the counselling required when they file a bankruptcy or a consumer proposal.
In my twenty plus years in the insolvency business, I can honestly state that the accredited, not for profit credit counsellors I have worked with have all worked very hard in the best interests of their clients, and I would never question their competence or integrity.
I agree that these are difficult times to be a not for profit credit counsellor. As Ms. Ross correctly points out, many years ago the government provided funding directly to not for profit credit counselling agencies. When that funding stopped, as Ms. Ross eloquently stated:
Some agencies were forced to close, others narrowed their service operation and the larger agencies continued to operate by finding alternative revenue streams. Revenue came from voluntary fair-share contributions from creditors, educational seminars for employee groups, the sale of educational material and the bankruptcy counselling that we do.
Over the years not for profit credit counsellors began to offer Debt Management Plans, or DMPs, where creditors (like the banks and credit card companies) would agree to make a “fair share” contribution to the work of the counselling agency to fund their efforts. In a DMP the creditors are paid in full, without interest, so a successful DMP is good for the banks, because they get back all of their money, and it’s good for the debtor, since they don’t have to pay interest, and they are given time to pay.
Unfortunately a DMP is generally not as good a solution for most people as is a consumer proposal. Again, to quote Ms. Ross:
The debt management plans, DMPs, available through credit counselling provide consumers with a workable option to repay debt. Most people who undertake DMPs are technically insolvent, or close to it, but are determined to honour their credit obligations and repay their debt. DMPs are negotiated with creditors to provide full debt repayment over an extended time frame. Upon acceptance by the creditors, member agencies manage and administer these DMPs and are authorized to operate trust accounts to facilitate payments to creditors.
Voluntary DMPs do not provide court protection for consumers, nor mandate creditors to stop charging interest on the debt, nor mandate a specified time frame for creditors to respond to debt repayment proposals. They do not mandate that creditors accept a pro-rated share of the debtor’s ability to repay, nor do they address complex entitlement issues that may require a more formal plan.
On the other hand, consumer proposals are a court-supervised option to repay debt. A consumer proposal is an offer made by a debtor to their creditors to modify their payments in an effort to settle the debt. Under a proposal, a debtor may offer to pay a lower amount each month over a longer period of time or to pay a percentage of what they owe. A significant benefit to consumers of a consumer proposal is protection by the courts from unsecured creditors. This is important because it prevents creditors from taking legal steps, such as seizing property or garnishing wages, to recover debts.
I agree with Ms. Ross. A DMP is not binding on the creditors. If you have five creditors, and only three of them accept the DMP, the other two can still attempt to sue you and garnishee your wages. In a consumer proposal, if the majority of the dollar value of creditors agree, all creditors must accept the proposal. It is legally binding.
It is easy to see the problem faced by not for profit credit counsellors. The government withdrew their financial support many years ago, forcing the closure of many agencies. Debtors who need the services of not for profit credit counsellors generally don’t have the money to pay for those services, so it is difficult for agencies to cover their operating costs. DMPs were a great way for not for profit credit counselling agencies to generate revenue to cover their costs (through the “fair share” contributions made by creditors), but as debtors realize that a consumer proposal is often a superior alternative, the percentage of debtors filing a DMP has fallen, resulting in reduced revenue for credit counselling agencies.
Realizing that consumer proposals are the superior alternative, many not for profit credit counselling agencies began working with trustees to offer consumer proposals to their clients. They would meet the debtor, asses their situation, gather the necessary financial information, determine their debt load, and then prepare the files for the trustee. The trustee then only had to “show up” at the credit counsellors office to witness the debtor signing the paperwork. The trustee would pay the credit counsellor for their work, and it was a “win-win” for everyone. The credit counselling agency earned some revenue, and the trustee had access to a steady stream of clients without having to do very much work.
Unfortunately, the OSB has rules against this approach. Federal law requires a licensed trustee to personally assess the debtor before they file a bankruptcy or proposal. Directive No. 6R3 Assessment of an Individual Debtor, requires the trustee to personally meet with the debtor and review their assets, liabilities and income, and to review all of the options available for dealing with their debt problems.
Section 49 of the Bankruptcy and Insolvency Rules states that:
49. Trustees shall not, directly or indirectly, pay to a third party a commission, compensation or other benefit in order to obtain a professional engagement or accept, directly or indirectly from a third party, a commission, compensation or other benefit for referring work relating to a professional engagement.
Trustees therefore cannot pay a referral fee to a credit counsellor for assessing a debtor, or helping to prepare the file, as described in more detail in the OSB position paper on Referral Agreements between Trustees and a Third Party.
Unfortunately once the OSB realized what was happening, they had no choice but to enforce the rules and stop these practices, as noted by Ms. Ross:
For some time, the larger of the credit counselling services had prepared files for consumer proposals on behalf of certain trustees. This included statutory counselling, interviewing and assessing the debtor, and confirming the debt load. The Superintendent of Bankruptcy has recently determined that it is incompatible with the trustee’s responsibility to outsource this work. This decision has affected our agency’s revenue to the detriment of its ability to provide broader services as well as BIA proposals.
I both sympathize and empathize with the plight of accredited not for profit credit counselling agencies. They are trying to help people deal with their debts. Who else is there to fight for the little guy (which is the reason Ted Michalos and me, Doug Hoyes, went to Ottawa to testify in the first place, as I noted in my opening remarks):
Mr. Michalos and I and our bankruptcy trustees spend each day meeting with people in financial distress. These are real people who, in many cases, have lost their jobs, gone through a marriage breakup or suffered through an illness; and after these personal tragedies, they are faced with insurmountable debt.
These are not bad people. We believe it is important that when parliamentarians draft bankruptcy legislation, they remember that real people are affected.
About 100,000 Canadians file bankruptcy or a proposal each year.
Unfortunately, that group is not organized and so probably will not have anyone to speak on their behalf before this committee. We hope that our testimony will highlight some of the concerns of the average bankrupt.
Banks want you to borrow money on their high interest rate credit cards. Finance companies want you to get a high interest rate loan. Payday loan companies want you to get a very high interest payday loan. They all spend millions of dollars in advertising each year to encourage you to borrow and consume.
Not for profit credit counsellors fight against this onslaught of debt. They spend many hours each day helping people work out a budget. They provide education programs to help the average Canadian understand the world of debt, and how to avoid it. They are the only voice in the wilderness telling you to spend less, not more.
But they can’t pay the rent in their offices, and pay their staff salaries, and pay for the supplies to help you make a budget if they have no revenue.
And that’s one of the reasons why, as Ms. Ross freely admitted, that not for profit credit counsellors want to be given permission to administer consumer proposals. It would give them a source of revenue so that they can continue their good work. Who could argue with that?
I certainly don’t argue with doing good work. I agree that someone has to tell Canadians to spend within their means, and to stop borrowing to consume.
Unfortunately I can’t agree with the notion that credit counsellors should be permitted to act as consumer proposal administrators as a way to increase their revenue.
My main objection to allowing non-licensed trustees to administer consumer proposals is that it is a government requirement that the trustee, as stated in Directive No. 6R3 Assessment of an Individual Debtor, must advise the debtor of all of their options, and the implications of all of their options. That means that as a trustee I must explain to all debtors the ramifications of doing nothing, do a debt settlement, getting a debt consolidation loan, doing a debt management plan through a not for profit or for profit credit counsellor, and doing a consumer proposal or personal bankruptcy. I can explain the implications of a bankruptcy, because I am a licensed bankruptcy trustee. I fully understand the process, so I can explain it. How can a non-trustee have the same level of knowledge as a trustee?
The Directive requires me to explain: “transfers, preferences and settlements of real or personal property of the debtor.” Is that something all credit counsellors understand? Do all credit counsellors understand the new surplus income rules, and how they are calculated in practice? Do credit counsellors understand the discharge process, and the court process, in a consumer proposal or a bankruptcy?
Credit counsellors would argue that they can learn all of those things, and I agree. The best way to become knowledgeable about the entire process is to become a trustee. Currently the average trustee has a university degree, many years of practical experience, and they have passed a series of very complicated courses that take on average five or more years to complete. It takes a long time to become a trustee. But, if a credit counsellor wants to become a trustee, they can find a sponsor, enroll in the program, and become a trustee, and then they can administer consumer proposals.
I believe this discussion is missing the real issue. As Ms. Ross correctly stated, not for profit credit counselling agencies are suffering from declining revenue, which is why they want to administer consumer proposals. The solution is not to make credit counsellors into consumer proposal administrators; the solution is to find a way to increase their revenue, doing what they do best.
What credit counsellors do best is credit counselling. They are highly skilled in providing advice on budgeting and money management. They are excellent educators. They should concentrate on what they do best. But how do they generate the revenue to cover their costs to provide this un-biased money management education?
The most obvious answer is through the revenue they receive from the credit counselling that they provide to individuals that have filed a bankruptcy or consumer proposal in Canada. Every individual that files bankruptcy or a consumer proposal is required to attend two credit counselling sessions, as described in Directive No. 1R2, Counselling in Insolvency Matters. Many trustees in Canada, including my firm, Hoyes, Michalos & Associates, outsource the majority of our credit counselling sessions to external counsellors. We do this because we want our debtors to get the best possible counselling so that they learn proper money management skills, so that they don’t have any future money problems.
Rule 131 of the Bankruptcy & Insolvency Act Rules prescribes the rate that is to be paid for the two required counselling sessions: $85 for each individual session, or $25 per person if the counselling is provided in a group session. In other words, a trustee may “outsource” the counselling requirement to a licensed credit counsellor, and the trustee may pay the credit counsellor, from the funds in the estate, $85 for each individual credit counselling session.
While $85 may sound like a lot of money, it isn’t. Many counselling sessions can take an hour or more, and that $85 must cover the counsellor’s wages, and all other overheads (like rent, administrative costs to book the appointment, training costs, etc.). Even worse, that $85 amount has remained unchanged for many years. $85 in 1994 is the equivalent of more than $115 in equivalent dollars today.
So the first, and most obvious solution, is to increase the amount that is paid for credit counselling sessions. Increasing the rate to $115 per session would bring the tariff back to where it was in 1994. I would go one step further: I would increase the rate to $125, or even $150 per session. Those increased resources would provide greater revenue to not for profit credit counselling agencies, since trustees would have more resources to pay them.
In addition to increasing the rate, I would increase the number of credit counselling sessions required.
Currently the first session must be done in the first 60 days of the bankruptcy or proposal, with the second session completed before the 210th day. That timing makes sense for a bankruptcy that lasts for nine months, but it may not be sufficient for a bankruptcy that lasts for 21, 24, or 36 months, as they often now do under the new bankruptcy rules. It’s also not sufficient for a consumer proposal that can last for up to five years.
So, my second suggestion is that for all bankruptcies that are automatically extended past nine months, a third counselling session should be added, to occur at some point in the second year. In addition, for all consumer proposals that last for greater than twelve months, a third counselling session should be added.
This new third session could focus on a review of the techniques learned in the first two sessions, and could include a review of the budget the debtor should be keeping during their insolvency process. This extra counselling session could be used to review different methods of saving (like the new Tax Free Savings Account), and could cover more advanced budgeting techniques. Perhaps this new counselling session could include an interactive web based component, allowing debtors to track their budget information on line. There are many tools that already do this, such as Calendar Budget, so it would not be that difficult to develop the content for the new third credit counselling session. Credit Canada, a not for profit credit counselling agency, has created a Financial Coaching Series that costs $120 per session for six sessions, so the expertise and content already exists for this extra counselling session. In fact, I would seek the input of the not for profit credit counsellors, including the OACCS, to help design this third session.
By raising the counselling rate from $85 to $125, and by adding a third session, the revenue generated by each personal bankruptcy or consumer proposal would increase from $170 to up to $375. That increase in revenue would go a long way towards helping not for profit credit counsellors help the people they want to help.
Is this the perfect solution? Probably not. I’m sure with further consultation even better strategies can be developed. But with this approach the real problem of reduced revenue for not for profit credit counsellors can be solved, without creating a new problem of having non trustees administering consumer proposals.
The year 2009 was an important year for bankruptcy legislation in Canada. On September 18, 2009 the bankruptcy rules changed, making it more expensive and more complicated to file bankruptcy for certain people, due to changes in the surplus income rules. Today’s question: do the surplus income in bankruptcy rules discriminate against women? First, some background:
Under the new bankruptcy Canada surplus rules, if you have surplus income greater than, on average, $200 per month, your bankruptcy is automatically extended for a further 12 months. Under the old rules a person who had never been bankrupt before would be automatically discharged in nine months in most cases. Under the new rules, a first time bankrupt with surplus income is now bankrupt for 21 months, and they are required to make surplus income payments for the entire 21 months. It’s easy to see how the new rules increased the cost of a bankruptcy in Canada for many people.
Here’s a simple example (if you want to see a lot of examples, please consult our surplus income calculation pages).
Mary Smith is a single person with no dependents, and she goes bankrupt for the first time. She earns $2,200 per month (take home pay, after taxes). A single person with no dependents in 2010 is allowed to earn $1,884 per month, so Mary is $316 over the limit each month, so she is required to make a surplus income payment to the trustee of half of her excess, or $158 per month. If you are more than $200 over the limit on average each month your bankruptcy is extended for 12 months. Since Mary’s income is $316 over the limit, she will be bankrupt for an additional 12 months, meaning that, if her income doesn’t change, she will be making surplus income payments of $158 per month for 21 months.
The rules are quite simple: if you earn over the limit, you pay more, and your bankruptcy lasts for an extra year.
(As an aside, my normal advice to a person like Mary would be to consider avoiding personal bankruptcy in Canada by filing a consumer proposal. With a consumer proposal you negotiate a settlement with your creditors for a fixed payment each month, so you don’t have to worry about making a surplus income payment if your income increases).
What if you are not single? Here’s another example: Let’s assume that Mary’s sister, Sally, also decides to file bankruptcy. Sally is married, so when calculating the surplus income for her bankruptcy, the calculation is done using the family income, which in Sally’s case includes her husband’s income. Here’s an example, assuming that Sally earns $2,200 per month, Sally’s husband earns $4,400 per month, and they have two children, so they are a family of four. The surplus income threshold for a family of four in 2010 is $3,501 per month. Here’s the math:
Sally’s net pay: $2,200
Sally’s husband’s net pay: $4,400
Total family income: $6,600
Surplus threshold (set by the government): $3,501
Amount that family income exceeds the threshold: ($6,600 – $3,501) = $3,099
Surplus income payment required if both Sally and her husband were bankrupt: (50% of $3,099) = $1,549.50
Sally’s portion of the payment (Sally’s husband isn’t bankrupt, and in this example Sally’s income of $2,200 is one third of the family income of $6,600, so she pays one third of the surplus payment required, 33% of $1,549.50): $516.50
So Mary, a single woman earning $2,200 per month, makes surplus income payments of $158 per month. Sally, a married woman with a husband and two children, also earning $2,200 per month, makes a surplus income payment of $516.50 per month.
Is it fair that Sally pays more than Mary in her bankruptcy, even though they both earn the same amount? The government would argue that yes, it is fair, because Sally’s family income is higher, so it’s only fair that she should pay more in her bankruptcy. Again, the theory is that the more income your family earns, the more you pay in a bankruptcy.
Now, here’s where it gets tricky. What if Sally’s husband refuses to divulge his income? Sally’s husband may say “Wait a minute; I’m not bankrupt, these are all debts that you had before we got married, so I refuse to divulge my income; I don’t think it’s fair that the trustee will make you pay more money in your bankruptcy just because I’m earning more money.” So how is the calculation done if Sally’s husband refuses to divulge his monthly income to the trustee? The government has a special rule for just such a case. If the non-bankrupt spouse refuses to divulge their income, the threshold is cut in half! So, for a family of four, instead of being allowed a threshold of $3,501, Sally will only be allowed a threshold of $1,750.50! Here’s the math:
Sally’s available monthly income: $2,200
Other family unit members’ available monthly income (spouse refuses to divulge income, so assumed to be zero): $0
Family unit’s available monthly income: $2,200
Minus Superintendent’s standard for a family unit of four for 2010: ($3 501 x 50%, since spouse won’t divulge income) = $1,750.50
Amount that family income exceeds the threshold: ($2,200 – $1,750.50) = $449.50
Surplus income payment required: ($449.50 x 50%) = $224.75
(NOTE: In case you think this is a made up example, it’s not. This is the example the government uses to illustrate this concept. You can read it here on Directive 11R2-2010 on the government’s web site).
As you can see, two sisters, both with the same income, end up paying two separate amounts. Mary, a single woman earning $2,200 per month, makes surplus income payments of $158 per month. Sally, a married woman with a husband and two children, where her husband won’t divulge his income, also earning $2,200 per month, makes a surplus income payment of $224.75 per month.
So now for the key question: is this fair? Is it fair that two women, earning the exact same amount, pay different amounts during bankruptcy in Canada?
To determine whether or not this is fair, we would need to know more about Sally’s situation.
Having Sally pay more is fair if her husband has high income, and he is using that income to support himself, Sally, and their family. It could be argued that Sally’s financial situation is better than her sister’s, because with both her and her husband’s income, they are better off. Mary does not need to spend as much of her paycheque on living expenses, because her husband is also contributing towards the family expenses.
Of course the opposite argument can also be made. What if Sally’s husband doesn’t contribute his fair share? What if he wastes all of his money on gambling and drinking, such that Sally has no choice but to use her entire paycheque each week to pay the rent, buy food, and support her family? Is it fair that Sally is required to pay more just because her husband is a deadbeat?
I started this discussion by asking the question “do the surplus income in bankruptcy rules discriminate against women?” Obviously the surplus income rules are not gender specific. If we replaced Mary and Sally with Bob and Fred in these examples, the math would be the same. It’s quite possible for a husband to go bankrupt, and his non-bankrupt spouse could refuse to divulge her income. However, in my almost 25 years working with people in financial trouble, it is my experience that it is far more likely for a husband to refuse to divulge his income than it is for a wife to refuse to divulge her income. It is therefore more likely that a women will pay more in this situation than would a man.
So, in that specific case, yes, the surplus income in bankruptcy rules do discriminate against women.
What’s the solution?
First, let me make it clear that I don’t believe all men are deadbeats, spending all of their money on gambling and drinking. I happen to be a man myself, and I don’t gamble, and I don’t spend the grocery money on drinking. Over the years I have met with thousands of couples, and even when only one of the spouses has debt problems, it’s not all uncommon for the other spouse to be very supportive, and to want to do whatever they can to help their spouse get out of financial trouble.
Second, the non-bankrupt spouse may be refusing to divulge their income for perfectly good reasons. In the example above I assumed that Sally’s husband was a deadbeat, and that’s why he wasn’t co-operating. In fact, the exact opposite might also be true. Sally’s husband might be doing everything in his power to help his wife. He may have done the math, and realized that Sally would be better off if he didn’t divulge his income. In my example above where Sally’s husband earned more than she did, she ended up paying $516.50 per month in surplus income payments. When he refused to divulge his income, she was only required to pay $224.75. So, if Sally’s husband earns more than she does, Sally is better off if he doesn’t divulge his income.
How confusing is that? If Sally’s husband wants to help her, he will:
disclose his income if he earns less than Sally;
if he earns the same as Sally it doesn’t matter, the payment will be the same if he divulges or doesn’t; and
he will refuse to disclose his income if he earns more than Sally, since Sally will end up paying less.
A word of caution: in my example I assumed a family of four. The results will be different if Sally and her husband have no dependents. The answer is not as simple as “disclose if non-bankrupt spouse has lower income, and refuse if their income is higher”; each case may be different.
What’s my conclusion? There are cases where the rules may not appear to be fair. The surplus income in bankruptcy rules in Canada are very complicated. There are literally an infinite number of possible outcomes.
For your protection, it is absolutely critical that before you decide to file bankruptcy, you have a detailed consultation with a licensed bankruptcy trustee, and you ask them to explain, in detail, how your surplus income payment will be calculated in your case. Spending ten minutes with a trustee and a calculator will help you prepare for your bankruptcy. The rules are complicated, and there may be cases where they don’t appear to be fair, but with proper research you can understand how the rules will effect you, and you can be prepared for all possible situations.
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.
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.
The 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
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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.
A s the year draws to a close, it’s easy to see that 2009 was the most eventful year in bankruptcy in Canada in at least the last decade. There were two stories that captured our attention:
First was the massive increase in the rate of personal bankruptcy in Canada in 2009. It was only a few short years ago that Canada had it’s first year of more than 100,000 personal insolvencies, but when the final numbers are tallied for 2009 the number will be well over 150,000, by far the highest volume level in Canadian history.
Why the massive increase? Canadians are carrying more debt than ever, so they have no margin for error when times get tough. The unemployment rate in Canada increased in 2009, so as job losses mount, personal bankruptcy becomes the only solution for many. The other reason for the increase was the second major story of 2009:
What’s ahead for 2010? Unless the economy stages a remarkable recovery, it’s likely that bankruptcy levels in Canada will remain high. If you are experiencing financial trouble, consult a licensed bankruptcy trustee, and check back here every Monday morning in 2010 for the latest news and comments on bankruptcy in Canada from leading experts in the field.
posted by Doug Hoyes @ 
The not for profits currently providing debt management solutions will either fold or become proposal administrators, effectively removing one form of debt relief from the market.
