Consumer bankruptcies expected

Consumer bankruptcies in Canada spiked sharply in January, the beginning of what credit experts warn could be a wave of bankruptcies this year that are the inevitable result of rapidly rising unemployment.

"We're not even close to the filings we saw in 2004," said Bruce Alger, president of Alger & Associates, a bankruptcy trustee with several offices in Alberta. "We've got a ways to go yet."

More than 10,700 people in Canada declared themselves insolvent in January, an increase of 23.1% from the same month in 2008.

For the 12-month period ending on Jan. 31, 2009, 117,704 consumers had declared themselves insolvent, a 16% year-over-year jump.

Within minutes of publishing the latest bankruptcy statistics Tuesday morning, the federal government said the number of Canadians receiving employment insurance jumped to 560,400 recipients in January, up 22.8% from February, 2008.

Diane Finley, the Minister of Human Resources, said the federal government would spend an additional $60-million to process new claims more rapidly.

Although the Canadian economy created more than 163,000 new jobs between January and October last year, it has rapidly shed them since then. Between November and the end of February, more than 295,000 Canadians became unemployed.

By last summer, the steady work Daniel Asboth, 25, had as a drywaller in Toronto was all but gone.

But he still had to make payments on his "baby," an Acura automobile, and the rent, and credit-card bills that were piling up. "I was making $1,000 a week," Mr. Asboth said. "When you are used to getting that money, you don't think about saving, because you know you are going to be getting that money at the end of the week. Then, all of a sudden, it stopped."

Mr. Asboth admits he was "bad" with managing money, but said he felt blindsided when his work ran out and debt went up.

Finally, in October, owing more than $25,000, he decided that declaring bankruptcy was one of his few options.

Ian Lee, a former mortgage officer at one of Canada's banks and now a business professor at Ottawa's Carleton University, told a parliamentary committee Tuesday that, while the recession is the chief cause of what will be a rapidly rising bankruptcy rate this year, too-easy access to credit, and consumers who have become addicted to borrowing, are aggravating factors.

"There hasn't been a lack of access to consumer credit. Consumers are wildly over-leveraged. The problem isn't being able to get credit at the consumer side, it's they have too much credit in terms of what they carry," Mr. Lee told MPs.

"These numbers represent people who almost certainly will be unable to be part of the economic recovery," said Michel Arnold, executive director of Option consommateurs, a Montreal-based non-profit consumer advocacy group.

Mr. Lee noted household debt, as a percentage of household disposable income, had doubled in the last 25 years, from 15.7% in 1981 to 36.2%. At the same time, the savings rate plummeted to 0.5% in 2005, the lowest level recorded by Statistics Canada since the 1920s. In other words, for every $100 Canadians receive in income, they are saving, on average, 50 cents.

"One of the points that this recession is bringing out is the fact that people have been carrying a lot of debt, and this is an eye-opener, because when that job is lost or those hours are cut, it really sets off a panic," said Linda Stern, a Toronto-based bankruptcy trustee and vice-president with Deloitte and Touche Inc.

In Calgary, Mr. Alger said the recent layoffs in the oilpatch have yet to translate into higher bankruptcies, though he expects that to pick up in the next several weeks.

Many new bankrupts are connected in some way to the construction or housing markets, which were red-hot a year ago and have now cooled.

Mr. Alger said that, in Calgary, when house prices were soaring, many consumers borrowed against that new equity in their homes and now housing prices have tumbled back to earth, credit is no longer available, or is too pricey for those with outstanding second or third mortgages.

Others are tradespeople or contractors who are unable to make payments on equipment or tools bought during last year's boom.

"It's people that don't have a safety margin," said Mr. Alger. "If you're living paycheque-to-paycheque and the paycheque's gone, you're in trouble if you're servicing a bunch of debt."