519-646-2222Insolvency: Bankruptcies and Proposals.
In Canada Consumer Insolvency: Bankruptcies and Proposals are still relatively new, that is relative to the extension of institutional credit to individuals. Consumer insolvencies only really came to the fore following the Marquette Decision in the USA (Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp., 439 U.S. 299 (1978)) which essentially stripped away usury laws that had protected people from excessive interest charges.
Marquette led to a proliferation of credit cards and ither forms of debt into consumer markets, initially uptake by consumers was relatively slow but as downward pressure continued in the face of inflation and minimum payments were reduced to bare, if at all, covering interest charges consumer debt markets have neared saturation levels.
Criminal Interest Rate.
In the USA interest rates are set by each state, and following Marquette, it was determined that the prevailing rate of interest chargeable against goods and services is dependent not on the residency of the consumer but on the business from which goods and services are acquired. The result is that states must compete for businesses by allowing higher rates of interest, or the business will simply pack up and move somewhere else.
The “criminal interest rate” (the rate above which interest cannot be legally charged) in Canada recently changed, coincidentally, around the same time as the Government was making a foray into street level lending through the Post Office. The rate dropped from 60% down to 35% – it appeared that the Government was using the change to impact competition from payday loan stores that had been charging up to 59% for their loans. However, this new rate still has exceptions for certain commercial loans and pawn loans, which have a higher permissible rate of interest of 48% APR.
Consumer Proposals vs Bankruptcies.
Consumer Proposals have been around for more than thirty years and allow Debtors to file a compromise to the value of the debt they are carrying as well as to freeze interest. As a rule of thumb a proposal should offer the creditors something better than they might otherwise receive from a Bankruptcy proceeding. As we have discussed in previous blogs, in spite of suggestive advertising there is no hard and fast percentage applicable.
Bankruptcy had long been a better option, in spite of the social stigma, in terms of both affordability and ease of filing. But that changed party due to a Toronto Court case in 2016. The case is referred to as LePage, after the Bankrupt individual involved. Basically the LePage case considered the treatment of the increase in equity of real property following the filing of a bankruptcy with the Court determining that any growth in the Bankrupts’ equity was deemed to be property divisible amongst the creditors.
Canada’s overheated real estate market had increased the “apparent” equitable position of most homeowners making them vulnerable to settlement in a Bankruptcy filing. We are living through an extremely unstable economic period, a clearly underregulated real estate market is in serious trouble with even the regulator being a party to fraud. Housing Prices in the London market have plummeted from a high of $823,842 in February of 2022 to $651,329 in August of 2025 – a decline of 21% with all economic indicators suggesting further drops will be coming.
Lags in the adjustment of surplus income, based on the unrealistic Low Income Cut Off is another factor leading to consumers deciding to file a proposal over filing a bankruptcy. The LICO no longer accurately reflected the true cost of living faced by Canadians and the governments new poverty line, 50% of median income, is even less in line with realism. The result being that Bankrupt’s could end up having to pay a significant sum of money at the end of their proceeding while proposals offered a set payment value. For people facing high surplus income payments, a mediation process is available to help mitigate the challenges presented by often unrealistic formulas.
Nonetheless, bankruptcy is a great solution in that it is a shorter process and often less costly, even though it may require higher payments over a shorter period of time for people who have “surplus income”
Insolvencies Not Planned.
Most people are surprisingly honest, in thirty years of working in the insolvency industry I have never come across a single person who set out to file a Bankruptcy as a part of some life plan. In fact, TransUnion, the credit reporting agency has reported that some 70% of Bankrupts have strong credit scores at the time of filing for Bankruptcy, meaning they are “current” with their payments.
Nonetheless, they probably haven’t made a payment with their own money for a long time, the banks have facilitated payments by increasing credit limits and providing more credit options allowing Debtors to use one form of credit to pay another. Yet most consumers believe “they” are making the payments, and, to be fair, given the means they would.
The cost of filing a Bankruptcy or Proposal has not increased in the time I have worked in the industry with the exception of raising the tariff threshold from $10,000 to $15,000 – which requires that liquid assets worth more than $15,000 exist in summary bankruptcies, and in most cases they do not. Trustees today actually earn about half of what they did 20 years ago, as a result of fixed fees coupled with inflation.
Rebuilding Credit.
Rebuilding credit is a primary concern for most people struggling to pay bills, why? Because they have become accustomed to living on debt! Few people can make it through a month without using some form of debt – to fund purchases or payments they couldn’t otherwise afford. From a lender perspective the margins of default are quite small while the profit margins are very lucrative. The goal of big lenders is to get you as far into debt as you get without missing payments, even if they are being made by some other form of debt, then you keep you there for as long as possible.
That said, lenders are probably every bit as interested in lending as you are in borrowing. We have seen people file for bankruptcy and within very few months have credit cards again. As debt markets near saturation the government dutifully opened the floodgates to more would-be borrowers – just Google “Canadian banks newcomer programmes” to get more information on the exploitation of both new immigrants and temporary visitors.
Access to credit in Canada, indeed the whole lending industry is underregulated in Canada – credit card payments are calculated over hundreds of years, the longest we have seen was 420 years, clearly the banks won’t regulate themselves. In the rare instances where banks do exercise lending restraint, there is always some private lender that pops up to fill the void. Debt in Canada is without a doubt the largest single industry, it is ubiquitous and “the Canada Debt Market Report Q1 2024 (BDO) says that year-to-date loan issuance (which includes business/private sector debt) was CAD $1.5 trillion, and that loan issuance increased ~6% compared to the same period in 2023″.
Interestingly, debt growth is far exceeding all other economic growth in the country, in Q1 2024 GDP grew by 4% spurred on by mass migration, while per capita GDP shrank by about 28%, in the same period debt grew by 6% year over year. While debt was in the trillions, Canada’s nominal GDP in Q1 2024 was only about CAD $751,172 million (seasonally adjusted). Clearly debt is unstainable both by consumers and the government – rather than focusing on acquiring new debt we ought to be attending to permanently extracting ourselves from the debt matrix .