Bankruptcies falling

The number of insolvencies crept up in August compared to the previous month, suggesting Canada’s economic recovery is losing momentum, according to statistics released Tuesday by the Office of the Superintendent of Bankruptcy.

The number of insolvencies crept up in August compared to the previous month, suggesting Canada’s economic recovery is losing momentum, according to statistics released Tuesday by the Office of the Superintendent of Bankruptcy.

The number of filings were dramatically lower than a year ago, when recession-racked consumers rushed to file before stricter rules took effect, but the federal agency said it was rare for insolvencies to rise between July and August.

“Over the past 10 years, there were only three years when the total number of insolvencies filed in the month of August was higher than the total number filed in July,” the bankruptcy office said in its monthly statistical report.

There were a total of 10,951 involvency filings in August, including 370 by businesses and the rest by individuals.

Total consumer and business insolvencies, which include both bankruptcies and proposals to creditors, were down 12.4 per cent from August 2009 but up 1.9 per cent from July.

The 10,581 consumer insolvencies in August included 7,115 bankruptcies and the remaining 3,466 were proposals to creditors.

While the year-over-year decrease is encouraging, the rising month-over-month figures are an important reminder that Canadians could very well be in the “eye of the storm,” and insolvencies could spike higher, says bankruptcy trustee Douglas Hoyes of Hoyes and Michalos and Associates.

“We are farther along in the recovery than we were a year ago, so that’s good news,” Hoyes said but added: “It could very well be that this is a temporary blip up and we could see further weakness ahead.”

The year-over-year figures are considered to be somewhat of an imprecise measurement because lthe number of filings in August 2009 was affected by a large number of indebted consumers who rushed to beat legislation introduced last fall that made filing for bankruptcy more difficult, Hoyes said.

A 12-month comparison, which pegged the decrease in insovencies at a more modest 2.5 per cent, may be more indicative, he added.

Shortly after the figures were released, federal finance minister Jim Flaherty announced Canada’s economic growth rate likely slowed to 1.8 per cent in the third quarter.

The economic recovery has slowed faster than expected since the spring, when growth fell to two per cent from growth rates of 4.9 and 5.8 per cent in the fourth quarter of 2009 and first of 2010.

And as growth slows, economists have issued severe warnings to consumers about their record high debt levels, saying that the spending might not be sustainable when interest rates inevitably rise.

On Tuesday, the federal bankruptcy office paid specific attention to the growing number of seniors entering bankruptcy, which has more than quadrupled in the past two decades.

From 1989 to 2009, the proportion of insolvent consumers among those 55 years of age or older has risen from 4.6 per cent to 20.6 per cent, the office said.

Hoyes said the troubling demographic shift could be due to a growing number workers in their 40s and 50s with mortgages and other debts and find themselves unemployed.

“It used to be that those were your prime earning years, you were topping off your RRSP and saving as much as you could … but now (they think) ’I don’t care about retirement, I’m cashing in my RRSP so I can afford to live’.”

Bankruptcy trustee firm A. Farber & Partners said the statistics on seniors reflect that their finances are increasingly vulnerable and that pensions and old age supplements aren’t enough to sustain them.

“They are turning to credit cards and lines of credit just to keep themselves above the water line, eventually forced to file for protection when these sources of cash run out,” the firm wrote in a release.

Hoyes says that his firm received more calls from indebted consumers in August than it did in July, and the number of calls has continued to rise during September and into October.

“We’re certainly not out of the woods,” he said.

“It is a small incremental baby step type of recovery, what’s saving people right now is that interest rates are still very low.”

Hoyes warned that September could show another monthly rise in insovencies, adding that a very weak U.S. economy, as well as a rise in domestic interest rates could threaten to derail Canada’s recovery and send bankruptcy rates higher.

Both the monthly and yearly statistics reflected a widespread trend of falling bankruptcies and rising proposals.

The number of Canadians who declared bankruptcy in August fell 25 per cent from last year, when many consumers rushed to beat new regulations introduced September 2009 that make bankruptcy filling more expensive and time consuming.

Meanwhile, the alternative consumer proposal, which offer creditor protection while a portion of debt is repaid, has risen 37 per cent.

The number of bankruptcies was down 0.4 per cent and proposals up 7.2 per cent in August from July.

Consumer proposals were introduced in the 1990s for people who can’t afford to pay off their debts in full, but have income that is consistent enough that they can continue to make monthly payments.

They’re being used more and more in the aftermath of the global financial crisis, when consumer bankruptcies skyrocketed as much as 56 per cent, year-over-year.

Consumer insolvencies dropped 12.1 per cent this past August compared to August 2009, while business insolvencies were down a whopping 20.6 per cent.