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The Changing Face of Insolvency

March 10, 2022

The face of insolvency has changed many times and it continues to evolve.  At one time bankruptcy was mostly for wealthy people or large companies – it allowed them to settle their unpaid debts with a fair and equitable distribution of their assets.  The poor had no assets to avail themselves of the services of legal counsel or a trustee, depending on jurisdiction.  The sale of assets by the trustee provides the trustee with a pool of funds from which to draw its fees and make some form of restitution to creditors.   

As we moved into the twentieth century the nature of banking changed and the way that credit was administered evolved tremendously.   Although many people don’t realize it, at the beginning of the twentieth century credit cards were around.  They were not the credit cards that we recognize today but they were cards, and they permitted the user to charge some goods and services to their monthly account and then pay the bill at the end of the month.  These cards were particularly suited for the use of travelling salespeople.

As the century advanced the Bankruptcy Act was written, in 1919, it codified the process for the declaration of bankruptcy and set out the procedures required to be followed for the debtor to be discharged.   Without assets, the bankrupt would have to pay out of pocket for the trustee’s services and costs, including advertising the bankruptcy, hosting creditor meetings and court attendances.  The process was cumbersome, and back in 1919 when the Act came into force very few people carried commercial debts.

It is my understand that Division I proposals were added to the Act in 1949.  Division I proposals allowed debtors to enter a negotiation and make an offering to their creditors that would compromise the original payment agreement and settle the debt.  If the creditors voted the proposal down, the debtor would automatically become bankrupt, their property would be sold, and the monies distributed fairly among the creditors by the trustee.  As with the bankruptcy process there were meetings of creditors and court hearings, making the process both cumbersome and costly and out of the reach of most ordinary people.  If you have read our blogs, you may be familiar with the evolution of credit cards as we know them today.  This evolution really began in the late 1970s with high interest rates no longer being viewed as usurious and with the proliferation of credit cards in the marketplace.

In 1977 there were about 8 million bank issued credit cards in circulation in Canada – which then had a population of around 24 million people.  In other words, there was only one credit for every three citizens.  Forty years later in 2018 there were 76 million bank issued credit cards in circulation in Canada with a population of 37 million, the credit cards were grossly outnumbering the people.  There were more than two credit cards for every single person in the country.  Imagine that!

The volume of debt, as well as the number credit cards increased exponentially.  Bank lending practices were barely regulated, and profits were from low level, low risk, lending were really taking off.  Unfortunately for the consumer, insolvencies were also on the rise.  Bank profits were so great they could afford to set aside significant provisions for losses and carried on regardless.  The need for bankruptcy services to be available for ordinary folks resulted in further changes to the Bankruptcy Act, which evolved into the Bankruptcy & Insolvency Act (BIA).  The changes streamlined the process and reduced the cost making insolvency proceedings affordable for ordinary people.  These changes were the result of escalating consumer debt which had a direct relationship to the proliferation of credit cards.  By 1992 when the BIA was again reformed to make it more accessible to consumers there were 24 million bank issued credit cards in circulation three times as many as back in 1977.  We should also be mindful that in 1980 the overnight rate, the rate at which the Bank of Canada lends money to chartered banks, peaked at 21% (with an annual average of 13%) as a result credit cards commonly had an interest rate of 32%.

The banks kept pushing credit cards because the profit margins were so good.  However, as the overnight rate returned to more normal levels around 7% which dropped bank issued mortgages back from a high of between 18% in 1980 to about 9.5% in 1992.  The margin on mortgages was not even close to the margins on credit cards, but the sheer volume of debt was somewhat compensatory.  We have yet to see a significant decrease in interest rates on credit cards even though the overnight rate is currently 0.5%.  The average bank issued credit card is charging just shy of 20% and some credit card rates are still in the 29% range.

While the BIA has been updated, and you should look to this link for a summary from the Office of the Superintendent of Bankruptcy, the changes have been relatively minor and have not addressed many of the challenges that people face.  Unfortunately, governments are more interested in reports, statistics, and data sets but they forget, far too often, that there are real people, with real struggles behind those numbers.  

We have recently seen some changes that appear to be minor.  But they are related to technological changes which could herald in further, more significant changes to Canada’s insolvency regime.  The lockdowns created a need to use technologies such as video conferencing and electronic document signing in to facilitate ongoing service.  The courts also moved to a video conferencing and electronic documentation model.  As science has slowly filtered through the narratives we have started to move towards a logical reopening.  Yet, the fear induced (mostly by the media) over the last two years will not easily go away.  People are still demanding remote services, and the Superintendent has responded by allowing some of these services to become permanent.  Some trustees embrace the idea of working from one office and using technology to get their work done while others prefer a more hands-on approach for meeting clients.

But the real question is “how far will these changes take us and how much more will the Act itself evolve?”.  For instance, could we get to a place where we have self-administered insolvency proceedings?  Imagine if you filled out a form online and upon its submission, consent was given for all your known information to be electronically collated and compared to the information you presented.  Bots would first check your residence, employment, credit information, income tax filings and property ownership including real estate, bank investments vehicles, etc.  If the information doesn’t properly collate with what is known about you, an automated call will reach out to advise you that certain information must be confirmed and updated for you to proceed.  After that is done you select what type of insolvency you wish to file, proposal or bankruptcy, you select your own payment arrangement which may be accepted if reasonable or rejected if not – allowing you the opportunity to update your payment arrangements.  The system would then simply take your digital currency out of your digital wallet as a priority.  The counselling sessions that are currently completed by a LIT or a qualified counsellor could be done online with you being required to watch informative videos and answer questions on an online worksheet while you are biometrically monitored.

Now there is something to think about.

Meanwhile we are still meeting people the old-fashioned way as well as integrating technology into our practice.  Call for your free consultation 519-646-2222