Question Period Note: CONSUMER INSOLVENCY

What is the Government of Canada doing to address the apparent rise in consumer bankruptcies?

• Canada's economy is strong, growing and creating good jobs for the middle class.
• Consumer insolvency laws give Canadians with severe financial difficulties a fresh start, while maintaining a balance between the interests of debtors and creditors.
• All parties in the insolvency regime have an important role to play in an insolvency resolution, including the courts, which provide a mechanism to balance various interests.
• The Government of Canada will continue to monitor economic data and to ensure that laws remain up-to-date and responsive to the needs of Canadians and our economy.

SUPPLEMENTARY MESSAGES
If pressed on number of repeat consumer bankruptcies:
• The number of repeat consumer bankruptcies has remained relatively stable since 2011.
• Consumer insolvency laws contain safeguards to prevent fraud or abuse, including enabling creditors, Licensed Insolvency Trustees, and the Superintendent of Bankruptcy to intervene in bankruptcy discharge hearings.
• Courts can also impose conditions on bankruptcy discharges, such as requiring future payments to creditors, to maintain the integrity of the insolvency regime and prevent abuse.

Individuals who encounter financial distress and are unable to service their debts may resort to insolvency proceedings under the Bankruptcy and Insolvency Act (BIA). The BIA’s principal role is to create a framework for collective action to settle creditors’ claims against the debtor to prevent a “rush to the courthouse”, maximize value, and ensure an orderly distribution of the proceeds.

Consumer insolvency proceedings can take the form of bankruptcy or a consumer proposal. In a bankruptcy, the debtor's property, subject to certain limitations, is liquidated by a licenced insolvency trustee, and the proceeds are distributed to their creditors. In return, the debtor receives a “fresh start” by being released from most types of debts through a bankruptcy discharge. With a consumer proposal, the debtor enters into an agreement with his or her creditors to repay, over a period of up to five years, all or a portion of what the debtor owes. Both types of consumer proceedings are designed to provide a fresh start to honest but unfortunate debtors; strike a balance between the interests of competing creditors; and provide certainty, by ensuring transparency, and efficiency and impartiality.

The BIA contains safeguards to help protect creditor interests and prevent abuse and fraud. The BIA requires debtors with financial means to contribute a portion of his or her income toward the outstanding debts ("surplus income"). The period before being eligible for discharge is longer for those with surplus income and for those who have previously been bankrupt. There are safeguards in the BIA to prevent against fraud or abuse. Creditors, the trustee, and the Office of the Superintendent of Bankruptcy (OSB) can oppose an automatic bankruptcy discharge in appropriate cases through the courts, which can impose conditions (e.g., additional payments to creditors), suspensions, or refusals of a discharge in appropriate circumstances.

The BIA was amended in 2009 to make second-time bankrupts eligible for an automatic discharge after 24 months for those without surplus income payments, and 36 months where there is surplus income. The amendments created additional consequences for second-time bankrupts (first-time bankrupts could get automatic discharges in nine months without surplus income, and in 21 months with surplus income). The 2009 amendments also preserved the OSB’s, creditors’ and trustees’ abilities to oppose a discharge for any bankrupt, which continues to serve as an important safeguard for creditors. Under the BIA, third-time, fourth-time, and fifth-time bankrupts are not eligible for an automatic discharge and courts will typically require the fulfilment of certain conditions before discharge, such as a payment to creditors (conditional discharge). Courts may also suspend the discharge for a fixed period, or refuse the discharge completely in appropriate circumstances.

Insolvency levels have remained relatively stable over the last decade. However, there has been an increase over the last year for both consumer and business insolvencies compared to previous years. According to the OSB, consumer insolvencies increased by 8.9% over the 12-month period ending on October 31, 2019, while business insolvencies rose 4.2% over this time. It should be noted that some media sources and commentators have stated that there was a 13% increase in consumer insolvencies during this time; however, this number is based on comparing the number of insolvencies in the month of October 2019 with the month October of 2018, which does not accurately describe the change over a 12-month period.

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