The Office of the Superintendent of Bankruptcy just released bankruptcy statistics for the months of September and October, 2011, and the results showed that bankruptcies are down considerably from last year. For the year ended October 31, 2011, personal bankruptcy filings in Ontario dropped by almost 24%. Consumer proposal filings increased by 7.3%. Combining bankruptcies and proposals, consumer insolvencies are down over 11% from last year. Across Canada the rate dropped by 8%, so Ontario's performance is better than the national average.
A drop in bankruptcy filings in Canada is good news, right?
Yes, in general, fewer bankruptcies is good news for the economy. Fewer insolvencies implies that more people are working and are able to service their debts, and that's good news for everyone.
Next question: will bankruptcy levels continue to drop in 2012?
Probably not, for four reasons:
First, when the unemployment rate decreases, bankruptcy rates tend to decrease. That makes sense; if more people are working, more people are making money, so fewer people have debt problems. However, according to Statistics Canada, the unemployment rate dropped to a multi-year low of 7.1% in October, and has been increasing every month since, and in January hit 7.5%. It's therefore quite possible that the increase in the unemployment rate at the end of 2011 will lead to more bankruptcy filings in 2012.
Second, the average debt level of all Canadians continues to increase. According to Statistics Canada, in the third quarter of 2011 Canadians were carrying debt equal to 153% of their annual disposable income. That's the highest level in history, and it means if you earn $1, you probably have debt of $1.53. That a huge number, and it doesn't take a lot of thinking to realize that the more debt we have, the more likely we are to get into financial trouble.
In other words, we now consider high debt levels to be normal. Twenty years ago you were very worried if you couldn't pay your credit card bill in full each month. Today we think it's normal to just pay our minimum monthly balance.
Third, we are used to high levels of debt, but the lenders are also getting used to it. TD Bank Chief Executive Ed Clark said at a banking conference on Tuesday that the lender would be reluctant to push someone out of their house if they can no longer afford payments if it was still comfortable with the mortgage. Think about that statement: banks don't want to foreclose on your house. Great news, right?
Yes, but are banks not pressuring borrowers as much out of the goodness of their hearts? Not exactly. The banks realize that if they were to foreclose on everyone's mortgage that is one or more payments in arrears, they might own many of the houses in Canada! So, instead, they are willing to work with you, at least up to a point. That's good, because if they are working with you, you are less likely to need to go bankrupt.
But what happens when your mortgage gets so far behind that the bank can't work with you anymore? They may waive a payment if you are a month behind on your credit card, but will they do nothing if you are three months behind? At some point the bank must take action, and if they do that in 2012, we could see an increase in consumer insolvencies.
There is a final reason why it is possible that bankruptcy filings will increase in 2012: "debt consultants".
At Hoyes Michalos we believe you should understand that the debt consultants you hear making wild promises on the radio are not always telling the whole truth, which is why we have written many articles like The Problem with Debt Consultants, Debt Consultants: Why Doesn’t The Government Stop Them?, and Debt Consultants: Some Horror Stories.
The fact is that in Ontario many thousands of people are paying money, right now, to debt consultants to solve their financial problems. These debt consultants have a simple sales pitch:
We can settle your debts for 30 cents on the dollar. Pay us $500 (or whatever) per month, and after three years we will have accumulated the money we need to make a settlement with your creditors.
That sounds great. Unfortunately, most credit card companies won't wait for three years to get paid. I can guarantee you that Revenue Canada won't wait for three years to get paid. After a few months of non-payment they are likely to start garnisheeing your wages, at which point the debt settlement plan collapses.
My prediction for 2012: we will do hundreds of bankruptcies and consumer proposals for people who paid thousands of dollars to debt consultants only to realize they got scammed. Why are bankruptcy numbers down? One reason is because instead of filing bankruptcy, many people are paying debt consultants. Those people may well need to go bankrupt in 2012, so when those people enter the system, bankruptcy filings will jump.
(This is an easy prediction for me to make, because in the last two months the professionals at Hoyes Michalos, myself included, have met with over 100 people who are currently in plans with debt consultants, but now they realize they need to file a consumer proposal or go bankrupt).
So what does this mean to you: Don't be a statistic.
If you realize that your debt consultant isn't helping you, give us a call. If you have a lot of debt, try to deal with it on your own. Here's my advice on the easy way to budget:
Or, to find out all of your options, give us a call at 1-866-747-0660, and we'll arrange a no charge initial consultation to help you deal with your debts, so let's get started.