Consumer Bankruptcy
| Author | Stephanie Ben-Ishai; Thomas G. W. Telfer |
| Pages | 415-502 |
CHAPTER 11
Consumer Bankruptcy
“I got a job and I tried to put some money away
But I got debts no honest man can pay”
— Bruce Springsteen, Atlantic City (Columbia, )
I. INTRODUC TION
It is a long-standing principle that the honest but unfortunate bankrupt deserves to be dis-
charged or released from the burden of debts. But what policy basis justies the bankruptcy
discharge? In this chapter we focus on those aspects of Canada’s insolvency system that
are specially designed to address the problems of consumer bankruptcies. There are good
reasons for the distinction between business and consumer bankruptcies. Functionally, con-
sumer bankruptcies raise very dierent social, economic, and legal issues than business
bankruptcies. Consumer bankrupts are eligible for a release from debts through a discharge.
In contrast, as pointed out by the Supreme Court of Canada in Orphan Well Association v
Grant Thornton Ltd, SCC at para : “Corporations with insucient assets to satisfy
their creditors will never be discharged from bankruptcy because they cannot satisfy all their
creditors’ claims in full (BIA, s ()).”
Over the past thirty years there has been phenomenal growth in the number of consumer
insolvencies. See the graph below and, generally, Oce of the Superintendent of Bankruptcy
(OSB), Annual Statistical Reports. More than any other chapter in the casebook, this chapter
reects the interplay of social, economic, and legal issues and the absence of an eective con-
sumer voice in the drafting of the Bankruptcy and Insolvency Act, RSC , c B- (BIA) con-
sumer insolvency provisions. One could teach an entire course on consumer insolvency law.
A. Growth in Consumer Insolvencies
A variety of reasons explain the phenomenal growth in the number of consumer insolven-
cies since . Probably the single most important factor is the commensurate growth in
all forms of consumer credit during the same period and, since the mid-s, the impact of
the availability of credit cards to most Canadian consumers. Industry Canada reports that:
The ratio of consumer debt to personal disposable income in Canadian households has
increased from approximately percent in to percent in . T he increase
can be attributed to higher mortgage debt levels and an increase in home equity extrac-
tion, both associated with elevated housing prices. Higher mortgage debt levels are a
BANKRUPTCY AND INSOLVENCY LAW IN CANADA: CASES, MATERIALS, AND PROBLEMS
potential source of risk as Canadians may be more vulnerable to a decline in housing
prices or an increase in interest rates.
A number of empirical studies have been conducted in Canada over the past twenty-ve
years to identify the types of Canadians who go bankrupt and the reasons given by bankrupts
(and, in some cases, by the trustees in bankruptcy) for their nancial diculties.
Oce of the Superintendent of Bankruptcy, Insolvency and CCAA Statistics in Canada, online: www.ic.gc.ca/
eic/site/bsf-osb.nsf/eng/br.html#annual.
Among the most common reasons cited for bankruptcy were those related to credit card
debt, adverse employment changes, and business failure (see Iain DC Ramsay, “Individual
Bankruptcy: Preliminary Findings of a Socio-Legal Analysis” () Osgoode Hall Law Jour-
nal ; Saul Schwartz, “The Empirical Dimensions of Consumer Bankruptcy: Results from a
Survey of Canadian Bankrupts” () Osgoode Hall Law Journal ).
The trustees themselves, in their reports to creditors and the court at the time of the debt-
or’s application for discharge, often blame the bankrupt’s poor money management skills.
Creditors also endorse this explanation, but put much of the blame on Canada’s insolvency
system. Many of them believe it is too easy for debtors to go bankrupt and obtain a dis-
charge from outstanding debts. The amendments to the BIA were meant to stanch the
ow of bankruptcies by introducing the regime of mandatory payments of surplus income
by debtors in section of the BIA (see below, Part IV), but basic problems remain substan-
tially the same as before.
Industry Canada, Corporate, Insolvency and Competition Policy: Statutory Review of the Bankruptcy and
Insolvency Act and the Companies’ Creditors Arrangement Act (Ottawa: Industry Canada, ) [foot-
notes omitted].
0
25,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
Consumer Insolvency Rate
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
Cha pter : Consumer Bankruptcy
B. Bankruptcies vs Proposals
The above chart illustrating the number of consumer insolvencies represents the total of
two very dierent proceedings. Consumer insolvencies are subdivided into consumer bank-
ruptcy proceedings and consumer proposals. A debtor may make an assignment in bank-
ruptcy (or be forced into bankruptcy by creditors) or choose to make a proposal. A bankruptcy
will involve the debtor giving up all non-exempt property to the trustee in bankruptcy. At the
end of the bankruptcy the consumer will receive a discharge (discussed below). A proposal
will involve the debtor avoiding bankruptcy by entering into an agreement to pay o creditors
over time. The number of consumer proposals now exceeds the number of consumer bank-
ruptcies. In , there were , consumer bankruptcies and , consumer proposals.
The extract below seeks to explain the increase in the number of consumer proposals.
Jason Allen & Kiana Basiri, “Impact of Bankruptcy Reform on Consumer Insolvency Choice”
() : Canadian Public Policy at – and
In September , the Canadian government passed legislation to encourage nancially
distressed individuals to le for debt restructuring rather than declare bankruptcy. The
amendments to the Bankruptcy and Insolvency Act included increasing the maximum
debt limit (excluding debt secured by principal residence) for ling a consumer proposal
(Division II), thereby allowing consumers to escape bankruptcy or the more onerous
Division I proposal. It also increased the cost of ling for bankruptcy for high-income
debtors. Specically, it codied that all high-income debtors face wage garnishment for
months rather than months. . . .
For nancially distressed individuals, the decision about how to le for formal insol-
vency — via bankruptcy or debt restructuring — involves trade-os. Filing for bank-
ruptcy results in a fresh start, whereby almost all debt is forgiven, assets not protected
by exemption limits are seized, and creditors must cease collection action. Filing a pro-
posal, however, involves a formal restructuring plan with reduced debt repayment over
a three- to ve-year period. Debt restructuring allows individuals to keep all their assets
and also maintain access to cheaper credit markets. . . .
In , the Canadian government reformed the BIA, increasing the attractiveness
of Division II proposals and increasing the cost of bankruptcy. The government policy
was extremely successful in steering indebted households into the most cost-eective
debt restructuring plan. Another way of seeing this is that the previous debt limit for
Division II proposals was too tight. Relaxing the constraint allowed debtors to make a
more cost eective choice. In addition, the BIA amendments led to an increase in pro-
posals relative to bankruptcies. The main benet of bankruptcy is debt forgiveness. T he
main cost is a loss of unprotected assets. The two ke y benets of proposals are that lers
are able to keep their assets and can maintain access to credit markets. The cost is (par-
tial) debt repayment. Take-up of proposals increased by . percentage points after the
change in legislation and has trended upward since. This would imply that individuals
value the increased access to proposals, in addition to disliking the increase in wage gar-
nishment associated with bankruptcy for those with high income.
Oce of the Superintendent of Bankruptcy (OSB), Insolvency Statistics in Canada — Annual Report
(Ottawa: Innovation, Science and Economic Development Canada, ), online: www.ic.gc.ca/eic/
site/bsf-osb.nsf/eng/h_br.html.
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