The Price of Progress: New Bankruptcy Rules Hurt Some People They Were Designed to Help

One of the longstanding and fundamental purposes of the Bankruptcy and Insolvency Act of Canada has been to allow honest but unfortunate debtors to deal with unmanageable debt so that they can make a fresh start and resume their places in the community. For those of you who are unaware, September 18, 2009 was a very significant day in the Canadian Insolvency community, as some major amendments to the Bankruptcy and Insolvency Act were implemented. Many of the changes greatly anticipated and long overdue, some examples include:

  • Increasing the limits for consumer proposal from $75,000 to $250,000 in non-mortgage debts;
    Reducing the time limit that must elapse prior to Student loans being eligible to be discharged from 10 years to 7;
  • The creation of a federal exemption making RRSPs now exempt from seizure;
  • Implementing a clause that stipulates secured loans and leases cannot be terminated simply due to the filing of a bankruptcy;

As you can see, many of these new amendments are very positive and go a long way to enhancing our current insolvency system. However, as with any type of change often there are unanticipated consequences and it is these unanticipated consequences that cause me some concern. While the vast majority of these amendments were positive, I feel that there are a few that are not consistent with the original purpose of this legislation.

For example, earlier this week I met with a 56 year old gentleman who had recently suffered a very serious heart attack and as a result is awaiting surgery. This heart attack has dramatically changed his ability to function on a daily basis and left him unable to work in his field of expertise. As I met with this individual, I learned that he had been bankrupt before. In fact, he filed for bankruptcy in 1981. This bankruptcy was largely a result of conditions that were beyond his control. At the time he was operating a small proprietorship that was servicing the oil and gas industry and, by all accounts, was doing reasonable well for himself.

But unfortunately, as many people may remember, this was a very difficult time in the oil and gas sector due to a combination of political and market conditions. As a result, this gentleman was one of many who was left without work and no prospect of work for quite some time. Without going into too much detail, this first bankruptcy, which occurred approximately 28 years ago, proceeded smoothly and a discharge was successfully obtained without any difficulties, and from by all appearances this gentlemen seems to have spent the last 28 years working hard to raise a family and support 5 children.

Throughout this time he has remained steadily employed, made regular contributions to an RRSP, only once had to rely on Employment Insurance and overall appears to have done everything that could be expected. Having learned his lesson from the first bankruptcy, he didn’t regularly carry large amounts of debts, has always driven used vehicles and seems to have been fairly prudent. Unfortunately this all changed on July 15, 2007, the date of his first heart attack. This first heart attack wasn’t terribly serious in the grand scheme of things, but it was the first of three, and the third heart attack was very severe, so severe that he is now awaiting surgery and has been told that he will never be in a position where he will be able to resume his previous activities.

The net effect of all of this is that since July 15, 2007 he has only been able to work intermittently. At first they were able to rely on his wife’s income and some Employment Insurance benefits and this worked well until near the end of 2007, when his wife was laid off. As a result of this lay off they had to use most of their RRSP’s to survive, as the small disability pension simply wasn’t enough. This seemed to work until the RRSP’s ran out and being left with no other choice they began to supplement their deficit each month with credit cards and the like, all the while planning on paying things back as his health improved.

So now this man and his wife live very modestly and try their best to survive on total household income of $3400, of which he was bringing in an estimated $2360 net each month. As I visited with this couple, it was very clear that I was dealing with honest people who were in a very unfortunate position. The end result is that they can afford to live, but they cannot afford to pay back an estimated $58,000 of debt, when you factor in the shortfall from the truck that used to be required for work.

Here is the problem: based on the changes to the Bankruptcy and Insolvency Act this person the estimated cost of bankruptcy in this situation would be $409.88 a month, an amount that will be a struggle to pay. This payment will also last for a total of 36 months, which will result in a total cost of a bankruptcy of approximately $14,755.76. While this is obviously a fraction of the total debt, we have a two people on the verge of retirement who are supposed to be in some of their highest paid years in the job force, who now have to struggle for the rest of their lives just to get by.

Now the question I have been wrestling with is whether or not this is consistent with the overall goal of a system that permits an honest debtor, who has been unfortunate, to secure a discharge so that he or she can make a fresh start?

This is an example of one of the unanticipated consequences that unfortunately represent the price associated progress. Not to suggest that this is the only problem with the legislation, but it is simply an example that I use to demonstrate some of the difficulties that still remain. While I don’t believe this was intended by anyone involved in the process and credit many of the misgivings implicit in these amendments to the manner in which this legislation had to be rushed through the legislative process in an effort to gain approval prior to falling of a minority government.

I do believe that it is important for Insolvency Professional’s across Canada to do our part to identify the remaining issues in an effort to make sure that the Superintendent of Bankruptcy, our Federal Government and of the other stakeholders recognize that while improvements have been made, there is still work that needs to be done.

For those of you are curious about what can be done when if you are in a situation similar to the one above, the best advice is to talk to a local trustee. In the above situation, the debtor decided that the filing of consumer proposal was going to provide a way to avoid a bankruptcy and some of the more negative consequences of a second bankruptcy but still enable a way to deal with the debt in a manner that reduced the total amount he would have to pay and to do so in a fashion that would fit into his budget.