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Bankruptcy and Consumer Proposals: The Big Picture: Bankruptcy is a legal proceeding that enables an insolvent person (debtor) to cope with a financial crisis by relieving the person of his or her financial obligations. Bankruptcy is often a last resort for those with debt problems.
A Consumer Proposal enables a debtor to restructure his or her affairs, often allowing an extension of the time for payments of debts. If a proposal is done in accordance with the Bankruptcy and Insolvency Act, it allows a debtor to restructure their finances without having to get the consent of each of the creditors.
We will look at how bankruptcy and proposals developed in Canada and why they are a necessary part of our society and economy.
Bankruptcy and Consumer Proposals: The Big Picture. Where Bankruptcy Began
Critics of bankruptcy often give the impression that it is a new invention. While there have been important changes to bankruptcy laws in recent years, there is nothing new about people and families suffering under the burden of extreme debt.
The word “bankrupt” is taken from the Italian word bancarupta, which means “bench broken” or “bank broken.” It is believed this term alludes to the custom in the Middle Ages of breaking a merchant’s marketplace table upon failure to pay a debt.
While the concept of “acts of bankruptcy” was developed in medieval Italy in response to insolvent traders, the concept of debt repayment is as old as civilization itself.
Bankruptcy and Consumer Proposals: The Big Picture: The Code of Hammurabi, written by King Hammurabi who ruled Babylon between 1792 BC and 1750 BC, contained one of the earliest attempts to set rules for setting debts:
If anyone fails to meet a claim for debt, and sell himself, his wife, his son, and daughter for money or give them away to forced labour: they shall work for three years in the house of the man who bought them, or the proprietor, and in the fourth year they shall be set free.
Bankruptcy and Consumer Proposals: The Big Picture: Ancient Greece followed similar methods of debt repayment. However, by the 7th century BC, the wealthy in and around Athens held so many of the poor in bondage that economic collapse and rebellion appeared likely. To avert potential disaster, the lawmaker Solon granted amnesty to many of those in bondage and outlawed contracts that used a person’s liberty as collateral for the debt.
Bankruptcy and Consumer Proposals: The Big Picture: Rome, in the 5th century BC, studied Solon’s reforms when it decided to codify its laws into the Law of the Twelve Tables. Julius Caesar scaled down debts, enacted severe laws against excessive interest rates, and relieved extreme cases of insolvency by establishing the laws of bankruptcy essentially as they stand today.
Bankruptcy and Consumer Proposals: The Big Picture. Bankruptcy in Modern Day Canada
From 1958 to 1971 in Canada, the consumer bankruptcy rate was at a fairly constant level, and, for a modern industrialized country, the rate was actually very low. For example, in 1968, Canada had 6 bankruptcies per 100,000 population, whereas the United States had 90.
Although, families and individuals with a low income across the country were trapped in a hopeless debt situation without a chance for getting relief from their debt. In 1972, a special joint committe from the Senate and House of Commons made recommendations on consumer credit and poverty. In response to this, the Canadian government passed the Poor Debtors’ Assistance Program, which lead to the bankruptcy rate rising sharply from 1972 to 1981.
The personal bankruptcy rate rose dramatically by 33% from 23,000 in 1981 to more than 30,000 in 1982, due to the deep worldwide recession. As the economy improved, the Canadian bankruptcy rate dropped from 1983 to 1985; bankruptcy hit record numbers in 1997 after rising steadily from 1985.
Bankruptcy and Consumer Proposals: The Big Picture. Why are Personal Bankruptcies on the Rise?
There have been many theories put forth to explain the reasons for the personal bankruptcy rate rising in Canada:
The stigma surrounding bankruptcy has decreased as people understand the situation more and that bankruptcy is a necessary choice for many individuals and businesses. Knowledge about the Bankruptcy and Insolvency Act has been spreading and credit counsellors, debt counsellors, legal aid providors and other professionals have a greater understanding of this federal Act, which provides debt relief to people with no other choice so they can continue to be productive members of society after receiving their bankruptcy discharge;
The bankruptcy rate is rising as the unemployment rate rises; as unemployment rates decrease, the bankruptcy rate will follow;
The ease of which credit is granted by credit grantors, who some feel are responsible for their loss when a debtor goes bankrupt, as they handed out credit too easily;
Bankruptcy is increasingly seen as a cost of doing bankruptcy due to a bad experience.
As Canada is a modern society, with easy credit available for individuals and businesses, society has become more accepting of dealing with some bankruptcies as a cost of the way our society functions.
Bankruptcy and Consumer Proposals: The Big Picture. Who Files For Bankruptcy or Files Proposals?
People from all walks of life for for bankruptcy or file proposals to their creditors. In my practice I have had people in the following professions and trades file for bankruptcy: teachers, carpenters, plumbers, housewives, doctors, nurses, lawyers, accountants, university professors, actors, labourers, airline pilots, truck drivers, students, airline stewards, mill workers, and more.
A study published by Carleton University reported the following demographics about their sample of people filing for bankruptcy:
* 59 percent were men;
* 32 percent were younger than the age of 30;
* For 28 percent of the people younger than 30, student loans were 50 percent or more of their overall debt;
* For 10 percent of the entire sample, student loans were more than 90 percent of their total debt;
* 43 percent were married (or living in a common-law arrangement);
* 29 percent were formally married;
* 28 percent were single;
* 15 percent were unmarried and had at least one dependent younger than 21 years old (this group is 10 percent of the general Canadian population);
* Bankrupts are slightly better educated than the general Canadian population;
* The median household income in the sample was about $24,000, well below the median income of $37,130 for all Canadian families and unattached individuals;
Bankrupts come from all walks of life and backgrounds.