Why Does Canada Need Bankruptcy Laws?

Canadian Bankruptcies Law

Many people wonder Why Does Canada Need Bankruptcy Laws?

The bankruptcy law in Canada has a positive effect on the average Canadian taxpayer. Bankruptcy law helps promote enterprise in Canada by encouraging entrepreneurship. Bankruptcy law also acts as a social safety net for individuals which provides them a fresh financial start and integrates them back into mainstream society as tax paying citizens.

Why Does Canada Need Bankruptcy Laws?

Encouraging Enterprise: A research study by Wei Fan and Michelle White in the Journal of Law & Economics, vol. 46:2, October 2003 found that locations with more lenient bankruptcy rules have higher levels of self-employed individuals, meaning that these regimes encourage enterprise. America’s liberal business bankruptcy laws are repeatedly cited as a factor in the US’ prodigious advantage over Europe in entrepreneurship. The Wei Fan and Michelle White study concluded that families who are homeowners are about 35 percent more likely to own businesses if they live in states with high or unlimited rather than low homestead exemptions, and the difference is statistically significant. Renters are 29 percent more likely to own businesses if they live in high-exemption states, and this difference is also statistically significant. Another significant factor in encouraging entrepreneurship is the fact that the business person who has a business that fails knows that he is entitled to a fresh financial start.

Do Canada’s Bankruptcy Laws Promote Entrepreneurship?

It is this writer’s view that Canada’s bankruptcy laws do a poor job in promoting entrepreneurship. Please refer to our article entitled The Inequity in Canada’s Bankruptcy Exemptions, where we cite the inconsistent application of bankruptcy exemptions from province to province and the low exemptions for a home as compared with the US home exemptions.

Canadian Bankruptcy Laws – A Social Safety Net for Individuals:

Consumer debt has risen greatly over the past 3 decades as credit grantors made credit available, credit card usage grew steadily, and other credit became available, such as a second mortgage. While debt is not bad, having bad debt can lead to financial problems. Domestic consumption is necessary for a strong economy in Canada, so credit being more freely available, is actually a strong factor in the strong Canadian economy. However, as debt grew as credit became available, Canadians as a whole came to realize there was a necessity for Bankruptcy Laws to assist people who became trapped in debt without a chance for repayment in full, especially on high interest debt such as credit cards or payday loan debt. While some people are against bankruptcy laws, it is important for a modern society to have these insolvency laws to prevent people from becoming part of the underground economy; this would not be good for them or their family but it would be especially harmful for society as a whole as well. As the government recognized this, Canadian bankruptcy laws became more lenient and available to more individuals in desperate need of debt relief.

The purpose of the bankruptcy laws in Canada is:

• Allow an individual trapped in debt to receive a discharge of his debts so they can get a fresh financial start, which allows them to remain a member of society;
• To treat the creditors fairly, so they can have a fair and timely distribution of the debtor’s non-exempt property;
• Give creditors a chance to quiz the debtor on their affairs, finances and expenses.