Insolvency and personal bankruptcy statistics change over time. Find out what the current trends are in the Greater Toronto Area and what those trends mean for the future.
What Does Personal Bankruptcy Mean?
You have heard of the term bankruptcy, but you might not know exactly what the process entails. Personal bankruptcy is a method of debt relief designed for individuals who owe more money than the total equity of their assets and cannot feasibly repay it. Individuals who decide to file for bankruptcy tend to have tried other options for debt reduction like budgeting or taking on second jobs without much success. The amount is too much for them to handle.
Essentially, when debt is overwhelming and other debt-relief methods are not helping, filing for bankruptcy might be the best answer. It’s for debtors who are hounded by calls from collection agencies every single day, or ones who have creditors threatening to take legal action over their infrequent payments. It’s designed for distressing financial situations.
Canadian residents are eligible to file for bankruptcy when they’re 18 years of age or older and they have to be insolvent — this means they owe a minimum of $1,000 and cannot make that payment when it’s due. Insolvency isn’t a short-term issue. You aren’t insolvent if you take care of the amount owed after receiving your next paycheque.
Before turning to bankruptcy, debtors should seek out the help of licensed insolvency trustees (formerly known as bankruptcy trustees) to see if this debt relief method is their best option. Licensed insolvency trustees will check to see if you meet all of the qualifications for personal bankruptcy and inform you if there’s a more practical choice available. It makes sense to go to a consultation before making any serious decisions since debtors must go to a trustee for the bankruptcy filing process.
Current Bankruptcy Trends
The Canadian Association of Insolvency and Restructuring Professionals (CAIRP) predicted that insolvency filings would rise in 2019 all over Canada. The prediction was based on previous data collected from the Office of the Superintendent of Bankruptcy Canada. The data shows that there tends to be a two-year delay between the announcement of an interest rate jump and the surge of insolvency filings. As you can see, the impact of the interest rates eventually takes its toll on consumers.
In 2017, the Bank of Canada announced its first interest rate hike in seven years. The move set big banks in motion, hiking up their own prime rates and raising the costs of borrowing. Since the announcement, rates have gone from 0.5% to 1.75%. It’s remained at 1.75% since October 2018 and hasn’t budged since. Some economists expect that the Bank of Canada will announce lowered rates in the near future, but there is no evidence that this change will happen.
Two years after that first interest rate hike, more consumers have filed for insolvency. The pattern is clear across Canada, especially in highly populated cities like Vancouver and Toronto.
Other than interest rate hikes, there are additional factors contributing to the rise in insolvency filings: high costs of living, stagnant wages and high rates of consumer debt. The average Canadian is not in a financially stable position. This year, an Ipsos survey revealed that approximately 46% of Canadians said that they’re within $200 of insolvency. A change in their paycheque or an unexpected cost could send them into unsustainable debt.
Bankruptcy in Toronto
Toronto is one of the Canadian cities that is seeing the steepest rises in insolvency filings. The rise can be attributed to hikes in interest rates and the city’s incredibly high cost of living — this is true for renters and homeowners alike. A resident making a minimum wage cannot feasibly afford to scrape by at the end of the year. They would have to cut out expenses for things like entertainment, internet and phone plans so that they could pay for essentials like rent and groceries.
According to Better Dwelling, there were 3,885 insolvency filings in the Greater Toronto Area in the first quarter of 2019 alone. The number of filings jumped approximately 12% from 2018’s first quarter. What’s interesting about the data is the difference between the types of insolvency filings. There are two possibilities that debtors can choose: personal bankruptcy or consumer proposal.
While personal bankruptcy is more well-known, fewer debtors are choosing to file for it. In Toronto’s first quarter, only 1,021 of the filings were for personal bankruptcy. The option dropped by 5% since the first quarter of 2018. On the other hand, the majority of filings were consumer proposals (2,864). The use of consumer proposals jumped by approximately 20% in a single year.
It’s clear that the Greater Toronto Area is turning to consumer proposals over bankruptcies as their preferred form of debt relief. It’s likely that the method will become more popular over time.
What Is a Consumer Proposal?
A consumer proposal is a legal agreement made between an individual debtor and their unsecured creditors. It’s designed for unsecured debts under $250,000. It can cover credit card debt, payday loan debt, unpaid utility bills and payments owed to the CRA (Canada Revenue Agency).
With the help of a licensed insolvency trustee, the debtor proposes a monthly payment plan for a reduced amount of debt. They will make these payments for a maximum of five years, and then the obligation should be considered fully-paid. The majority of creditors have to agree to the proposal terms. If it’s rejected, the proposal needs to be modified or the individual needs to turn to another form of debt relief such as bankruptcy.
If they accept the terms, that means both the debtor and creditors have come to an agreement. The debtor must make the monthly payments on-time until the repayment period is complete. The period is a maximum of 5 years. Once it’s over, the rest of the unsecured debt owed should be completely cleared.
In the meantime, creditors have to stop any collection actions. If someone is dealing with collection agencies constantly reminding them of their debt, they will appreciate the fact that their consumer proposal halts actions like collection calls, wage garnishing and penalties. Both sides must abide by the rules of the agreement.
What Is the Difference between a Consumer Proposal and Bankruptcy?
Consumer proposals and personal bankruptcy filings are the two main types of relief you can look to when you’re insolvent. Below are the reasons why the consumer proposal is chosen more often than a personal bankruptcy.
A significant reason why people pick consumer proposals instead of bankruptcy is that the proposal allows them to keep all of their assets. As long as they make their essential monthly payments, assets such as property and vehicles remain untouched. The less exciting news is that since the proposal doesn’t touch these assets, the debtor must make the secure loan payments for them. That means they have to deal with their mortgage, their car payments and their proposal’s monthly payment, too.
On the other hand, a personal bankruptcy only allows debtors to keep some of their assets. Major assets like second homes and vehicles could be released in order to pay creditors. Anyone who has significant assets to lose like properties, vehicles and other large investments may not find a personal bankruptcy as advantageous.
There may be exemptions for the debtor’s principal residence (or equity to a certain limit) and some equity in their personal vehicle. Here are some other potential asset exemptions from the bankruptcy process:
- Tools of your trade
- Personal items
- Pension plans
- RRSP investments
- Certain life insurance policies
Another consequence that comes with filing for personal bankruptcy is surplus income. After a debtor files for bankruptcy, they are allowed to keep a portion of their income for their own use. However, once they generate a higher amount than the set income, they have to contribute some of the surplus to the Bankruptcy Estate.
The surplus also extends the length of the bankruptcy. If it’s a first-time bankruptcy, then the process will be increased from 9 months to 21 months due to surplus income. If a debtor is going through the process for a second time and there are surplus income levels, then the length of the bankruptcy stretches from 24 months to 36 months.
Surplus income levels are set by Canada’s Superintendent of Bankruptcy and are based on factors like the number of people in the household and the available monthly income. A family of two that earns a combined income of $2,380 after non-discretionary expenses may not be required to make surplus income payments. But, a single-person household with that same income will likely have to make surplus income payments.
A consumer proposal does not deal with surplus income levels. Your payments are determined by the budget and income you have when the proposal is being made. After the unsecured creditors agree, debtors can have an increase in income without being penalized. If anything, they can try to use their additional earnings to pay off the agreed amount much faster.
A bankruptcy will stay on a debtor’s credit report for 7 years after the date of discharge. If a debtor files for bankruptcy for the second time, that label stays on their credit report for 14 years. That’s a significant time for a financial decision to follow you around.
Consumer proposals also get placed onto a debtor’s credit report right after filing. The label will be removed from the report 3 years after paying off the required amount. So, if you take the maximum amount of time to pay off the proposal (5 years), the label will come off the credit report 8 years after making the agreement with unsecured creditors. But, if you manage to speed up the payment process, you can get the label off faster.
Both relief options will drop an individual’s credit rating to a lower score. Low credit affects your ability to achieve financial goals like rent an apartment or apply for a car loan. Lower scores can be a hindrance for these milestones. These will be hard enough for a debtor to accomplish while they are dealing with a consumer proposal or personal bankruptcy.
But a low credit score should never be an incentive to avoid filing for either form of relief. In reality, ignoring debt and continuing to make payments through credit or unsecured loans will also harm your credit score. At least choosing a consumer proposal or choosing a personal bankruptcy gives you a way out of the deep trench. It won’t be easy, but it’s a solution nonetheless.
If you are concerned about your credit rating being too low, you can slowly rebuild your score. With a bankruptcy or consumer proposal, you can start over. You can work hard to push it further away from the lower end into a more acceptable range.
We offer many services for debtors to get them to bounce back from bankruptcy after their debt is finally paid, including credit counselling. One of our licensed insolvency trustees can teach you how to appropriately use credit and help you break bad spending habits. And they will assist you with the challenging process of rebuilding a poor credit rating.
You can also turn to our experts to get exceptional advice about budgeting. A carefully-made budget can stop you from turning to your credit cards — or worse, to a payday loan — and putting yourself back into an unstable financial situation. All of your necessary expenses can be tackled by your income.
As you can see from the recent trends, insolvency is on the rise. Personal bankruptcy is not getting used as the primary form of relief anymore. More individuals are filing for consumer proposals to deal with their insolvency, including members of the Greater Toronto Area. They’re doing this because consumer proposals are more lenient with assets, have shorter times on credit reports and have no surplus income payments whatsoever.