Why Bankruptcy Counselling Should be Discontinued

Bankruptcy Counselling in Canadian bankruptcies and consumer proposals should be discontinued because:

• It was designed to address a problem that did not exist when designed and does not exist now;
• Counselling is ineffective because, in the vast majority of cases, it does not address the causes of bankruptcy;
• It belittles debtors by suggesting that the cause of their bankruptcy was not the actual financial crisis they experienced but for the trivial and false reason of their not knowing basic money management skills;
• Counselling is a poor use of time by administrators and trustees especially, since most trustees think that, in the vast majority of cases, the bankruptcy is due not to the fault of individuals, but rather to events over which they have no control; they are just victims of circumstance.

Why Bankruptcy Counselling Should Be Discontinued – Counselling and its Purpose:

Directive IR3 defines counselling as:

“counselling” means to assist and educate bankrupts and/or relatives of bankrupts, or consumer debtors, on good financial management, including prudent use of consumer credit and budgeting principles; in developing successful strategies for achieving financial goals and overcoming financial setbacks; and, at any time, where appropriate, in making referrals to deal with non-budgetary causes of insolvency (i.e. gambling, addiction, marital and family problems, etc.);

Two counselling sessions are mandatory. The instructions to the trustee are outlined in Directive IR3

The Causes of Bankruptcy:

According the Superintendent of Bankruptcy the causes of bankruptcy for 2011 were:

1. Overextension of credit (22 per cent of all Canadian bankruptcies).
2. Seasonal employment (15 per cent).
3. Job loss (12.8 per cent).
4. Medical problems (11.3 per cent).
5. Relationship breakdown (10.3 per cent).
6. Money mismanagement (9.2 per cent).
7. Failed business (9.1 per cent).
8. Failure to pay taxes (3.6 per cent).
9. Gambling addiction (2 per cent).
10. Inadequate pension (1.4 per cent).

As can be seen from these reasons there is little that can be attributed to not understanding money management.

Results from Studies:

Carol Ann Curnock: Insolvency Counselling Innovation Based on the Fourteenth Century (1999)

Her conclusions are:

In 1992, Canada became the first country in the world to officially deem personal bankruptcy both a failure to learn, and the probable result of a psycho-social illness, by legislating mandatory counselling as a prerequisite for discharge from bankruptcy.

English Abstract:

In the fourteenth century, poverty (previously viewed as a virtue) was redefined by both church and state as illegal and immoral.

This view persists in Canada today. The 1992 amendments to the Bankruptcy and Insolvency Act (BIA) included a provision that makes two counselling sessions mandatory for all persons going through bankruptcy.

The author reviews The BIA Insolvency Counsellor’s Qualification Course that was developed in support of this amendment, and concludes that it is not up to the task.

The mandatory counselling presumes a bankrupt person’s irresponsibility, addiction, and need for referral to community service agencies.

However, these presumptions are based on inadequate data and unsupported assumptions about the lives and characters of bankrupt persons. They are not derived from an unbiased, accurate assessment of a bankrupt person’s learning needs.

The author suggests that, rather than being innovative, Canada’s approach to bankruptcy perpetuates a fourteenth century stereotype of people in financial difficulty.

Saul Schwartz: Counselling the Overindebted: A Comparative Perspective (2005)

In summary, I believe that Canadian bankruptcy counselling does not fulfill the promise of financial education. Even if the system helps the rare bankrupt, it seems wasteful to have a system in which the vast majority of counselling is either unnecessary or ineffective.

And, since I do not believe that most bankruptcies are the result of financial imprudence, I do not think it advisable to train all counsellors to follow the example the counsellor discussed in the last paragraph.

What Trustees Think about Counselling:

Trustees as Noted by Saul Schwartz’s Study (above):

The trustee supports mandatory counselling despite believing, as do most trustees, that bankruptcy is not often an avoidable consequence of personal irresponsibility or ignorance.

Many trustees believe that their clients’ bankruptcies are unavoidable because they are caused by events such as unemployment, illness or family disruption.

The Writer of this Blog:

I was in practice when counselling was first mandated in 1992.

I was dismayed at the implication that bankrupts were the authors of their own misfortune.

I, and all trustees, know this is untrue.

In the vast majority of cases, bankrupts are subject to a crisis beyond their control.

It was also personally embarrassing to me to have to sit face to face with a bankrupt and go over money management when that was not the cause of the bankruptcy.

I felt I was being pedantic, paternalistic and presumptuous.

Counselling should be discontinued as soon as possible. It does not address a problem supported by empirical evidence. Counselling is not effective. It treats bankrupts with disrespect and paternalism. It is a waste of time for administrators and trustees.