Bankruptcy's the quick fix

"Our bankruptcy laws are not onerous," Bennett says. "In fact, they encourage individuals and companies to take protection from creditors who are pressing collection of their accounts." Bankruptcy does not even mean debtors lose all their assets. Annuities and benefits from the Canada Pension Plan, Old Age Security and Employment Insurance cannot be seized by trustees. A short list of personal items is also exempt from liquidation, varying by province. In Ontario, this includes $5,000 worth of clothing, $10,000 in household goods, $10,000 in work tools and cars worth less than $5,000.

National Post
November 1, 2003

Bankruptcy's the quick fix
Canadians embrace insolvency as way out from under bills
Jonathan Chevreau

Debt may be a four-letter word, but in today's instant-gratification society there's always a fast fix for what ails you. And for those being crushed by growing mountains of bills, the quickie solution is bankruptcy.

Bankruptcies are soaring along with debt levels. In 1976, the year I graduated from university, 10,000 Canadians filed for bankruptcy. That number doubled by 1986, then tripled again to 62,300 by 1991.

In 2002, there were 78,210 personal bankruptcies and 14,290 consumer proposals — court-approved deals by which debtors agree to repay a portion of their debts and avoid bankruptcy. Such combined insolvencies could pass 100,000 this year, predicts Frank Kisluk, president of Toronto's Debtor Consulting Services Ltd. and author of Life After Debt.

While the absolute number of bankruptcies has stabilized, the amount of debt incurred in each insolvency continues to rise.

What's behind this alarming surge? People in the "debt industry" invariably point to the have-it-all-now mentality that tempts undisciplined consumers to spend more than they can afford. Society does all it can to draw people into the debt trap. Cars and furniture are peddled with no-money-down financing, as lenders fill our mailboxes with unsolicited, pre-approved credit cards. In this age, the loan sharks wear three-piece suits.

It doesn't help that consumers keep reading about high-profile corporate misfits like WorldCom (now MCI) emerging from bankruptcy cleansed of debt, and ask themselves, "If CEOs can do it, why not me?" Within that world view, bankruptcy becomes accepted as the easy way out.

This sharply contrasts with the older generation, raised in the Great Depression, which avoided debt at all costs. People "made do" until they could purchase a desired item with ready cash. Bankruptcy was considered the ultimate shame.

"Before 1970 there was some stigma attached to going broke," says Frank Bennett, author of Bennett on Going Broke: A Practical Guide to Consumer Bankruptcy. "That's all gone."

John Reagan, CEO of Asset Inc., which operates Repo Depo, a Toronto repossession service, describes three kinds of bankruptcies: of necessity, of convenience and of strategy. "Bankrupts are just average people. It's the convenience which makes [filing for bankruptcy] desirable."

Strategic bankrupts account for a rising rate of repeat bankruptcies. Often, these cynical debtors engage in deliberate overspending prior to filing, planning a final shopping spree for luxury goods and charging credit cards up to the maximum, then declare bankruptcy a few days later.

"There seems to be very little to control that kind of abuse," says John Owen, a Toronto-area credit consultant. He says the law should be amended to render luxury purchases made 90 days before bankruptcy "non-dischargeable," meaning debtors would have to pay those debts, bankrupt or not. (Changes to Canada's bankruptcy laws are expected as early as next week.)

While multiple credit cards are the biggest single cause of bankruptcy, Owen points out there are many others, including a disturbing rise in bankruptcies related to gambling and "private debts," a euphemism for money owed to old-fashioned loan sharks (as opposed to credit card executives).

Less common but still significant are bankruptcies involving a more respectable form of gambling: borrowing money to invest in the stock market.

Bankruptcy trustees are also seeing a greater demographic variety among bankrupts. On one side are high-income professionals who stiff the Canada Customs and Revenue Agency (CCRA) after income tax bills mount into multiple hundreds of thousands of dollars. At the other extreme are university graduates, who were reneging so often on student loans, the law was changed so they couldn't declare bankruptcy within 10 years of entering the work force.

"Our bankruptcy laws are not onerous," Bennett says. "In fact, they encourage individuals and companies to take protection from creditors who are pressing collection of their accounts."

Bankruptcy does not even mean debtors lose all their assets. Annuities and benefits from the Canada Pension Plan, Old Age Security and Employment Insurance cannot be seized by trustees. A short list of personal items is also exempt from liquidation, varying by province. In Ontario, this includes $5,000 worth of clothing, $10,000 in household goods, $10,000 in work tools and cars worth less than $5,000.

An increased emphasis on consumer proposals is a hopeful sign. Half the people who come to Kisluk's firm now make proposals to pay back some of their debts — though the Canadian average is closer to 17%.

Society benefits from this trend. Sadly, retirement savings are often the first thing to go when the social safety net fails, Owen says. Those in financial trouble start by tapping savings, then plunder their RRSPs as the last desperate act before bankruptcy.

Proposals can save your RRSP. Kisluk cites the example of a 50-year-old in the top tax bracket with $50,000 in an RRSP. Under bankruptcy, that nest egg is lost. The RRSP is collapsed and half goes to the CCRA, the other half goes to creditors.

But if the man agrees to pay $35,000 from earnings over three years under a consumer proposal, the RRSP can be salvaged. "If he can hold on to that bit of his retirement fund, he won't be on the dole because he lost it all," Kisluk says.

Bankruptcy should be the last resort, only after counselling, loan consolidation and other repayment strategies have failed. Those who face up to what they owe in time can be confident there'll be life after debt.

moc.tsoplanoitan|uaervehcj#moc.tsoplanoitan|uaervehcj

Part seven

© Copyright 2003 National Post


Brought to you by WikidFranchise.org

Risks: Bankruptcy, Loan sharking, Canada, 20031101 Bankruptcy’s the

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License