A third straight monthly decline in the number of Canadians who filed for bankruptcy indicates an economic recovery could be taking hold, but seasonal patterns and changes in insolvency rules make it unclear whether the trend will continue.
Consumer bankruptcies fell 8.6 per cent to 7,744 in December from November, following a 3.8 per cent decline in November. Proposals, an alternative to bankruptcy that allows for a renegotiation of payments, also fell by 16.8 per cent in December, according to statistics compiled by the federal superintendent of bankruptcy.
The Office of the Superintendent of Bankruptcies cautioned that filings have tended to decrease in the latter part of most years.
For the full year, bankruptcies were up by 25.9 per cent, and consumer bankruptcies rose by 28.4 per cent from 2008, when Canada and most other developed countries were in the midst of a major global recession.
The superintendent’s office said the increase was “entirely due to an increase in consumer insolvencies.”
TD Bank economist Grant Bishop said those findings are consistent with high levels of unemployment and debt that Canadians are carrying.
“Debt service costs are manageable until you go into a situation where you have no income and...with high unemployment, there’s a greater propensity of unemployed households...to file for bankruptcy.”
Bishop said the recent decline in the number of bankruptcies can also be attributed to changes made in September to the Bankruptcy and Insolvency Act, rather than a lasting downward trend.
“We saw a very elevated pace of insolvencies in September as kind of a moving forward of those who might have gone bankrupt in October (or) November because the rules made it such that the costs of bankruptcy are higher.”
He said the new rules increased the burden on bankrupt consumers to hand over their surplus income to creditors, and many on the verge filed ahead of the deadline.
Royal Bank economist David Onyett-Jeffries said the changes may be part of a longer term trend that encourages people to restructure debt as an alternative to declaring bankruptcy.
“The continuation of the downward trend in consumer bankruptcy filings appears to be an increasingly positive sign that Canadian households are getting a better grasp on their finances, especially when paired with the decline in consumer proposals,” he said.
But Bishop said he expects the number of bankruptcies filed in Canada in 2010 to remain stable, as unemployment and personal debt remain high.
“It will really depend on the degree to which households slow borrowing, we do certainly see in stress tests that as interest rates rise there will be a greater number of households with debt service costs over 40 per cent.”
The Bank of Canada is expected to raise interest rates in July above the current historically low 0.25 per cent rate.
Bishop added that debt pressures will not likely be removed from consumers until unemployment rates drop and borrowing slows, likely in 2012. But even then he said the pace of bankruptcy will continue to be higher than before the credit crunch.
The number of insolvencies, which includes bankruptcies and proposals for bankruptcy, was 7.2 per cent higher in December than in the same month of 2008.
For the entire fourth quarter of 2009, there were 26,235 bankruptcies filed, or 0.8 per cent fewer than the same quarter in 2008.
Overall, consumer and business bankruptcies rose to 121,801 in 2009. There were also 36,640 proposed bankruptcies, 38.5 per cent more than in the year before.
In sharp contrast to individuals, Canadian firms appeared to have fared remarkably well during the downturn.
Business bankruptcies fell 7.7 per cent in December and for 2009 as a whole, they were down 12.1 per cent, part of a trend that Bishop said is at odds with what he is seeing in the U.S.
“It does speak to a better positioning of our business sector relative to our cousins state-side.”
Bishop added that the number of per capita consumer insolvencies in the U.S. is even greater than in Canada.