The Insanity of the New Bankruptcy Rules in Canada
On September 18, 2009 the government of Canada brought into force all of the remaining amendments to the Bankruptcy and Insolvency Act that were approved by Parliament back in 2005 and 2007. At the time they were approved, the economy was booming and bankruptcy filings by individuals were stable. One of the goals of the new law was to encourage people to consider filing a consumer proposal as an alternative to personal bankruptcy. The law did this by dramatically increasing the cost of filing personal bankruptcy.
In 2005 the economy was booming. Today, the economy is in shambles. Personal bankruptcy filings are at an all time high. Unemployment is rising and people that in the past had no concerns about their jobs are now afraid that they may get “downsized” too. So, at a time when a record number of Canadian families are experiencing financial difficulties, what does the government do? They bring into force all the changes they passed when times were good. Insanity. There is no other word for it.
In a strong economy, the plan of increasing the cost of bankruptcy in Canada to encourage people to file more consumer proposals made a certain amount of sense. If a person is working with a stable income, then you can argue that they should try to repay part of their debt.
In a weak economy, with unemployment on the rise, EI benefits running out, and no prospects of a “job rebound” in sight all these new rules do is force people that have no realistic ability to repay a portion of their debts (via a proposal) to remain in bankruptcy for a much longer period of time.
So that we’re clear, the new rules extend a first time bankruptcy for individuals from 9 months to 21 months, if their household income is $200 above the government standards. For example, a family of 4 is allowed income of $3,474 per month. If they have income in excess of $3,674 per month their bankruptcy will be automatically increased from 9 to 21 months. Every month you remain bankrupt there is a cost (payment) that must be made. Let’s say they were required to pay $250 per month. Under the new rules they’d be required to pay $250 per month for 21 months, or $5,250. Under the old rules the total payment required would be only $2,250 ($250 per month for nine months). That’s quite a difference for a family struggling to pay the rent.
A single person has a surplus income threshold of $1,870. So, if they earn $2,070 per month or more their bankruptcy will run 21 months. The fellow on EI won’t get caught by this rule – their income will be below the $2,070 limit and their bankruptcy will run 9 months. If, however, they find work during the bankruptcy, such that their income rises above the limit the law automatically kicks in and they are required to pay for 21 months.
A lot of people may read this and say, “ok, bad luck for them, but it is still less than what they owe”… That is true, but what most people don’t realize is that more than 10% of all Canadians will file for bankruptcy at some point in their lives. If one of the goals of the new law was to encourage people to file consumer proposals (instead of bankruptcy), it does not make any sense to bring those rules into place when the economy won’t allow people to file a proposal. The income is simply not there. Insanity is the politest word I could find for it…
Insanity is a good description. Stats canada states a single person in 2008 (this is as recent as they compiled in their .pdf) who makes less than $1550 (after taxes) is at the poverty level in a city > 500,000 population. Clearly with inflation this number should be higher, perhaps as much as $1700. $1870 is about $200 more than the poverty level, or less than 10 % better off than living in poverty. That is an absolutely brutal cut off – and if you try to work overtime to make some more money for yourself, not only do you have to immediately pay half of it to the trustee, the extra income earned in the first 9 months can be calculated to be multiplied by at least 12, even if you never work overtime again !