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

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, consult a trustee in bankruptcy licensed by the federal government to ensure you understand the implications of deciding to file a proposal or bankruptcy.