Columns

The insolvency crisis

Ross Laver May 19 1997
Columns

The insolvency crisis

Ross Laver May 19 1997

The insolvency crisis

Personal Business

Ross Laver

For the third consecutive year, personal bankruptcies across the country are running at record levels. Some commentators— opposition politicians in particular—cite this as evidence of a profound economic crisis, the result of chronically high unemployment and heartless cuts to social programs such as welfare and unemployment insurance.

A closer look at the numbers, however, suggests another explanation: an alarming number of Canadians now view bankruptcy as a financial quick fix.

Consider: the unemployment rate in April was 9.6 per cent, compared with 11.9 per cent in late 1992. Over the same five-year period, the expanding economy created a million new jobs, bringing the employment total to 13.8 million.

Compare that with the number of personal bankruptcies. For a while after the last recession, it drifted steadily downward, bottoming out at 53,802 in 1994.

Then it took off, hitting 65,432 in 1995 and 79,631 in 1996. Another 14,055 Canadians filed for bankruptcy in the first two months of 1997, 11 per cent more than in the same period a year earlier.

So while the number of people without a steady paycheque has been going down, the ranks of insolvent individuals have been growing. What gives?

Barb Godin, the senior vice-president in charge of retail lending at the Bank of Nova Scotia, thinks she has the answer. Rather than trying to work out their problems and pay off as much debt as they can afford, Godin says, many people now resort to bankruptcy as the first response to financial distress.

She points out that in 30 per cent of the personal bankruptcy cases that land on her desk, there were no warning signs: no missed payments, no phone calls from the borrower pleading for more time, no attempt to use one credit card to make payments on another. Instead, the insolvency comes right out of the blue. “One day,

An alarming number of Canadians now view bankruptcy as a financial quick fix

they’re up to date on all their payments, the next day they’re bankrupt,” Godin says. “It’s as if the borrower suddenly woke up and said, ‘Heck, the bank made a billion dollars in profit last year—they can afford to absorb my debts.’ ” (In reality, the cost of bankruptcy is born by other borrowers, in the form of higher interest rates.)

Another trend that worries Godin is the rapidly accelerating pace of insolvencies among professionals. “I’d say that 90 per cent of these cases have to do with investments that went wrong or disputes over alimony. People are being told by their tax advisers that bankruptcy can make prudent financial sense, and that compared with the alternatives it carries no real consequences.” Nick Hodson, a forensic accountant at Ernst & Young in Toronto, has done his own research on the credit-card shopping habits of people in the months before bankruptcy. He found that consumers tend to spend more as insolvency approaches and are significantly more likely to make big-ticket purchases—expensive perfumes, stereo systems and so on. The study also pointed to a marked increase in the buying of gift certificates. “On the face of it, that suggests these are planned bankruptcies,” Hodson says. “People know they’re going over the dike, so they’re buying things for the future and loading up on gift certificates that can be used down the road for cash.”

Godin acknowledges that bankers and other lenders have to accept some of the blame for the surge in bankruptcies. But she also maintains that tougher laws are needed to discourage people from taking what is, at least in some cases, the easy way out. Just before the election call, Parliament passed a series of amendments to the federal Bankruptcy and Insolvency Act that, if enacted by the next government, will give trustees more power to garnishee the incomes of debtors in order to repay creditors. That’s a start, but more is required. Bankruptcy is meant to be a last resort, not a free ride for which responsible borrowers pick up the tab.