Statistics show that personal bankruptcy rates are getting smaller and smaller every year. It’s happening in the city of Toronto and across the country. So, what are people doing to solve their debts? Read ahead to find out why the rates are shrinking and what alternatives debtors are using.
Insolvency Rates in Canada
Industry experts predicted that insolvency filings would go up across Canada in 2019 because of growing consumer debt and raised interest rates. The experts based this specific prediction on previous instances of insolvency rates spiking upward. After looking over 20 years’ worth of data from the Superintendent of Bankruptcy Canada, they found that filings jumped in frequency two years after interest rate hikes were announced. The interest rates were raised by the Bank of Canada in 2017, which means the two-year delay is now complete.
The experts’ predictions came true. In May 2019, the Office of the Superintendent of Bankruptcy Canada revealed that the number of Canadian insolvencies rose by 8.6% in a single year. That’s a significant jump.
And individuals aren’t the only ones who are going insolvent. Businesses across the country are having financial trouble, too. The Canadian Association of Insolvency and Restructuring Professionals reported this unpleasant growth in early January. According to the report, business insolvency filings went up by 9% from November 2017 to 2018. Businesses in construction and retail were most likely to file for insolvency.
What Type of Insolvency Are They Filing for?
There are two main types of insolvency filings available to Canadians: personal bankruptcy and consumer proposals. Statistics show that fewer citizens are turning to bankruptcy for debt relief. Approximately 5,163 bankruptcies were declared by May of this year. It sounds like a high number, but this is a 1.9% drop from last year’s rates. On the other hand, 7,212 consumer proposals were filed by Canadians — a 17.5% rise in a single year. This is a growing trend across Canada.
You could find evidence of this shift in insolvency filings a decade ago. Over the course of 2007 to 2012, you could see that the rates of bankruptcies were declining. In 2007, they composed 64% of insolvencies. By 2012, they were 39.9% of them. That’s approximately a 15% drop in five years because of consumer proposals and Division I proposals.
Proposals are showing similar levels of growth with business insolvency filings. According to Better Dwelling, consumer proposal filings grew by 13.6% in a year. Bankruptcy filings only saw 3.2% growth over the same period. Technically, more businesses opted for corporate bankruptcy, but the statistics reveal that the popularity is waning and that it will likely be overtaken by proposals in the near future.
A personal bankruptcy is a form of debt relief for individuals that are insolvent — this means that they are unable to repay their creditors and that they have insufficient equity to cover these debts.
With the help of a licensed insolvency trustee (formerly known as a bankruptcy trustee), the debtor declares to creditors and courts that they are officially insolvent. At that point, they’ll begin the formal process of distributing assets to cover their outstanding debts. The process releases them from collection calls from agencies. It also stops any legal action taken against them like wage garnishment.
Filing for personal bankruptcy is a process meant for individuals. Corporate bankruptcy is designed for businesses that are insolvent. However, it does not work for businesses that are sole proprietorships — they will have to pick personal bankruptcy. You can click here to learn more about what is corporate bankruptcy and how do owners start the filing process.
Why Are People Filing for Personal Bankruptcy Less?
Personal bankruptcy is often considered a last resort for people who are insolvent. It’s a final solution for people in a dire financial situation. Most debtors will try methods like budgeting, credit counselling and consumer proposals long before they consider making an appointment with a licensed insolvency trustee and filing for this process. Here’s why people are wary about personal bankruptcy.
One of the reasons why people are wary about filing for bankruptcy is that the repayment process is overwhelming. It begins with a settlement of your assets. These will be surrendered to the trustee, sold and disbursed among the creditors in an effort to repay the debts owed.
The Ontario Execution Act lists these things as exempt from asset settlement:
- All necessary clothing
- A motor vehicle worth up to $6,600
- Household furniture and appliances (up to $13,150)
- Trade tools and equipment (up to $11,300)
- Some types of life insurance
- RRSP, RRIF and SPSP savings (except contributions made in the previous 12 months)
You can click here to better understand the personal bankruptcy filing process after collecting and disbursing assets.
The debtor will also make contributions to their bankruptcy estate until they are discharged. A trustee will have to monitor paycheques if there is any surplus income — this is when the household’s net income is crossing the threshold set by the government. If a surplus is detected, the debtor will have their bankruptcy costs increased and their payment period extended.
And one of the biggest worries that people have with personal bankruptcy is that it follows you long after you’ve been fully discharged. A first-time bankruptcy stays on your credit report for six to seven years. A second-time bankruptcy will double the time, sitting on the report for fourteen years.
Filing for bankruptcy can also make it more difficult to get certain career opportunities. Employers can ask if prospective employees have ever filed for bankruptcy, which they have to answer honestly.
If the employer requires that you get bonded for the position, then a current or previous bankruptcy could disqualify you as a candidate. It could be very difficult to seek employment in banking, accounting, construction and other jobs that handle expensive equipment or large amounts of money.
A consumer proposal (also known as a personal proposal) is a legally binding agreement made between a debtor and their creditors. It’s designed for people who owe less than $250,000 in total debt — this does not include a mortgage relating to their main residence. With the help of a licensed insolvency trustee, the debtor proposes repaying the creditors a lowered amount of their total unsecured debt.
If the majority of creditors agree to the terms of the proposal, the debtor has a maximum of five years to make the set payments. After reaching that lump sum or the end date of five years, the agreement is officially complete. They are released from the responsibility of paying off the original debt and can appreciate a better level of financial stability.
When the creditors accept the agreement, they can no longer take actions to collect payments from the debtor. This means that they can’t make collection calls. They also can’t go forward with any legal plans like wage garnishing, freezing accounts, etc. If the debtor misses out on three months of payments without filing an amendment to the proposal, the entire agreement is annulled. Then, the creditors can take any legal action against them that they wish.
The licensed insolvency trustee is not just a guide through the process. They’re a referee, too. They’re supposed to act as an intermediary between the debtor and creditors during the entire agreement. They make sure that the creditors don’t violate their terms, and they make sure that you follow the set payment plan.
The trustee is also there to help you when creditors turn down the terms of your first proposal. They will help you make reasonable changes and resubmit the proposal in hopes of getting better results. If that doesn’t work, they will be there to offer other debt relief solutions like credit counselling or filing for personal bankruptcy.
Why Do People Prefer Filing for Consumer Proposals?
There are several advantages that consumer proposals can have over personal bankruptcies. Here are a few examples that could inspire clients’ financial decisions:
For one, making more money during the consumer proposal won’t cause any problems with payments. The payment terms are set the moment that the creditors agree to them. They do not change after that, even if your income grows significantly.
If anything, the additional income can help clients complete the proposal sooner. To change the payment plan to be finished faster, you would have to file an amendment to the proposal with your licensed insolvency trustee.
This is not the case with personal bankruptcy. As stated earlier, additional income can be somewhat of a drawback for clients going through this legal process. Their payment period can get extended by an entire year, and their costs can increase.
Another difference between bankruptcy and consumer proposal filings is that the former requires you to surrender some of your assets in order to settle outstanding debts with creditors. A consumer proposal does not touch your assets, including vehicles and properties.
Now, this feature does come with a different type of challenge. Since major assets like houses and vehicles go completely untouched, clients have to continue making the essential payments while completing their consumer proposal plan. This means that you have to still take care of your mortgage/rent, car payments, insurance payments and more.
A consumer proposal doesn’t have the same long-term side-effects as personal bankruptcy. For instance, it is not common practice for employers to ask prospective employees to admit if they’ve filed a consumer proposal on applications. If the employer requires that you get bonded for the sake of job security, the consumer proposal is less likely to disqualify you from this process. You can still look for these career opportunities and get hired.
The proposal can potentially be on your credit report for less time than your personal bankruptcy, depending on what payment plan you take on. As previously mentioned, personal bankruptcy will sit on the report for approximately seven years if it’s the first time. If it’s the second time, it will be on the report for a total of fourteen years.
A consumer proposal will sit on your credit report for three more years after you finish it. So, if you take the three-year payment plan, you will have that mark removed from your report within six years. The only problem is that if you take the maximum period of five years to finish your payments, you will have the mark on your report for eight years. That’s one more year than a first-time bankruptcy. So, this can be considered an advantage or disadvantage, depending on your timing.
When Should You Pick Personal Bankruptcy?
In some cases, filing for bankruptcy can be seen as a better strategy for relieving your debt. If you don’t have any major assets that you’re worried about settling and you’re not moving forward in a career that requires bonding, going through with this option may be more effective for you.
In other cases, filing for personal or corporate bankruptcy may be your only option. It’s possible that your outstanding debts are higher than the limitations of the consumer proposal. Or maybe creditors have rejected your numerous attempts of submitting a proposal.
If you’re unsure about what’s your best course of action, you should set up a consultation with one of our licensed insolvency trustees. We will give you consumer proposal and bankruptcy advice you can trust so that you can make the most financially manageable and responsible decision.
Come to David Sklar!
We have helped thousands of people deal with their financial trouble. If you want to take care of your own unsecured debt, you should set up a consultation with one of our incredible licensed insolvency trustees. You can also email us or call us to learn more about the highly-effective services that we offer, like credit counselling, consumer proposal filing and personal bankruptcy filing.
The bankruptcy rates in the GTA — and the rest of Canada — are slowly going down. The pattern doesn’t mean that citizens are avoiding insolvency altogether but turning to a more convenient and accessible version of debt relief instead: the consumer proposal. It looks like consumer proposals will continue to grow in popularity and eventually take the lead as the ideal way to tackle financial trouble.