Published In

Banking and Finance Law Review

Document Type

Working Paper

Publication Date

2009

Subjects

Bankruptcy and Insolvency; consumer proposals; consumer bankruptcies; consumer debt; credit card debt

Abstract

Economic rehabilitation is the notion underlying Canada’s Bankruptcy and Insolvency Act (BIA), providing consumer debtors with an opportunity for a “fresh start” through the mechanism of bankruptcy or making a proposal to their creditors for payment of their debts on terms that allow them to rehabilitate their financial status. This article undertakes a comparison of consumer proposals and consumer bankruptcies, examining 5,773 individual insolvencies in the past two years, with a view to discerning choices by individual insolvent debtors of insolvency proceeding. It compares causes of financial distress, income levels, quantum of debt and the assets of those filing proposals or bankruptcies. The data indicate that overextension of credit is a primary cause of insolvency, being 20% to 24% the primary cause across all cohorts. Home mortgage liability is significant for the Division I proposal debtors, but less significant for bankrupts, many of whom do not have equity in homes. Credit card debt is a serious problem across all groups. Credit card debt, unlike fixed loans such as mortgages, can quickly escalate, is owed at much higher interest rates that can rapidly compound financial distress, and the lack of a defined payment plan, other than a minimum payment, means that consumer debtors are not encouraged to pay these debts first, leading to longer term financial distress. Yet, to date, insolvency policy does not really factor the nature of this debt into policy development. Job loss and seasonal employment together are a significant cause of insolvency across Division II consumer proposal debtors (26%), Division II business proposal debtors (33%), and bankrupts (28%), but less so for Division I proposal debtors (16%). These data suggest that there are broader economic and social challenges that need to be addressed, as financial distress is often beyond the control of the individual debtor. To date, there is little linkage in Canada between economic stimulus and employment policy development and insolvency law policy development. Medical reasons are also a significant cause for Division II business proposal debtors (15%) and bankruptcy (11%), compared with the other cohorts. However, it is uncertain whether medical bills and lack of coverage, or medical problems resulting in inability to earn sufficient income are the real source of the financial distress. Equally, medical debt may be masked if consumer debtors have paid for medical bills by credit card on exit from hospital or particular outpatient services, as is the normal practice in some regions. The study offers both observations on the data and recommendations for future research and policy development.

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