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.