News from The Globe and Mail


Saturday, March 20, 2004

Susan Brown recently quit her clerical job at an insurance company to stay home with her three-year-old daughter, a choice she wouldn't have been able to consider two years ago.

Back then, she and her husband were living with $137,000 of consumer debt and fielding calls from collection agencies, reminding them to pay up.

With an annual household income of $53,000 at the time, the Browns (not their real name) couldn't even make the minimum monthly interest payments on their loans and credit-card debt, which included purchases of a second-hand car, furniture from the Brick and numerous items from Canadian Tire.

Faced with the possibility of losing their home, a $140,000 condo in Toronto, they filed for personal bankruptcy in 2002 -- a decision with its own set of consequences, but one that gave them a second chance at life.

"It's not something you're proud of," Ms. Brown says. "At least I pulled myself out of it and now I'm recovering and we have a better life for it."

Declaring bankruptcy means turning the bulk of your assets over to a trustee and keeping your credit rating in the dog house for six years. However, it also means getting the help many people need to get out from under their debt and learn to manage their finances better -- which ultimately provides peace of mind and a healthier outlook for those who complete the process.

"For the most part, it's meant to give people a fresh start," says Jack Steinman, a manager with the Toronto division of the Office of the Superintendent of Bankruptcy Canada, an agency of Industry Canada.

Having emerged now from bankruptcy with the help of trustees Harris & Partners Inc., the Browns aren't as stressed out as they were before the proceedings, when Ms. Brown dropped seven kilograms from her petite frame and had to take a medical leave from work.

"If we wouldn't have done that, then God only knows," says Ms. Brown, who before declaring bankruptcy with her husband tried unsuccessfully to negotiate a deal with the couple's loans officer to lower their monthly payments. "We wouldn't be where we are now. It's terrible to say, but it's true."

"Now I can sit back and go, 'whew,'" Ms. Brown says. "I can manage my bills now. I'm not stressed out, you know. But I had to do that step."

Over the years, the number of people declaring personal bankruptcy has climbed and continues to escalate. Last year, 84,251 people went through the process, up from 53,802 a decade ago and 24,384 in 1987, according to the Office of the Superintendent.

It doesn't take much for people to experience a financial crisis these days. A prolonged illness, a marital separation or a job layoff is quite often enough to send them into financial dire straits and into the arms of bankruptcy trustees who help administer the bankruptcy process, experts say.

Dawn (who agreed to use only her middle name) says she's a proud woman and it took every ounce of her energy to go the bankruptcy route a decade ago, when she found herself separated from her husband, pregnant and carrying $20,000 in credit-card debt.

An increasing number of personal bankruptcy filings also have been by individuals who went into business for themselves, unsuccessfully.

Five years ago, Marco (he only allowed us to use his first name) didn't have any business experience and opened a hair salon at the age of 24. Right off the bat, there were a lot of start-up costs and the monthly payments piled up quickly. By the time he filed for bankruptcy in 2002, he says, he owed $90,000 to the bank and credit-card companies.

The easy availability of credit for consumers is a major contributing factor behind the rising number of personal bankruptcy filings. The average debt-to-income ratio for Canadians -- which measures the total amount a person owes compared with what he or she earns -- was 108 per cent last year, up from 89 per cent in 1995 and 55 per cent in 1985, according to the Royal Bank of Canada.

"With the debt-to-income ratio being the way it is and with credit being easily available, there are going to be casualties, and those casualties have translated into higher bankruptcies," says Dave Stewart, a senior project leader at the Office of the Superintendent.

Typically, people in a financial bind will first seek outside help from a local credit counselling service, but often they'll be referred by counsellors, lawyers and accountants to an office of bankruptcy trustees after they're told their debt load is too high for them to manage.

Trustees, who are listed in the yellow pages or on websites, such as, will help individuals decide after getting a complete overview of their financial situation whether they should file a consumer proposal or a personal bankruptcy.

The less severe route is the consumer proposal, which is an agreement between individuals and creditors to settle the debt and avoid bankruptcy. With a proposal, the assets remain with the individual, and he or she will pay a portion of the debt on a monthly basis to the creditors over a period of three to five years, typically.

With a bankruptcy, all of the individual's assets -- including real estate, cars and boats -- vest with the trustee and are then liquidated on behalf of the creditors, with some exceptions depending on the province. A person living in Ontario, for example, can keep $5,000 of personal belongings, $10,000 of household goods, $5,000 of vehicles and $10,000 of tools of the trade.

Sometimes, there's no interest in an asset because there's no equity for trustees to liquidate on behalf of the creditors such as the condo belonging to the Browns. Most people will be eligible for an automatic discharge from the debts and the duties of being bankrupt in nine months, trustees say.

In recent years, consumer proposals have become an increasingly popular option in insolvencies.

"More people are opting to come to an arrangement with their creditors as opposed to doing a straight bankruptcy," Mr. Stewart says.

Since Ottawa first made that option available in 1992, and amended the bankruptcy and insolvency legislation in 1997 that provided individuals greater incentive to take that route, the number of consumer proposals has risen from about 3,000 a year to 15,000 a year in 2003, Mr. Stewart says.

A bankruptcy stays on an individual's credit record for six years from the date of discharge, and a proposal stays for three years from the date of completion.

With a poor credit rating for three to six years, individuals often have a difficult time getting unsecured loans, such as credit cards, and financing for cars.

Diane (who agreed to use only her first name) filed for bankruptcy about two years ago after accumulating $40,000 in debt with her then-husband and received her discharge last summer. As a social worker, she recently needed to buy another car for work.

She felt the dealerships would judge her negatively as soon as she mentioned the "B" word to them. So Diane ended up getting a friend to purchase a car under her name, even though the ownership was in Diane's name.

"There's such a negative stigma with this thing," she says. "No one cares about the circumstances."

Quite often, it's recommended that bankrupt consumers re-establish their credit by getting a credit card. Many can only get one if it's secured with a down payment, and even then the credit limit is often between $250 and $700. Dawn, who shops more wisely now and pays for most things with cash, said she has a credit card for emergencies only and that it sits on the other side of her wallet.

After her own terrifying experience, Ms. Brown doesn't want anything to do with credit and is imposing a ban on it herself.

"Like my father used to say, 'If you don't have the money, then don't buy it,' " she says. "And to this day he always says to me, 'Listen to what your father says,' and I say, 'Well, Dad, I can't buy anything now unless I have money.' "

Warning signs

You may be heading for serious debt problems if you:

Are making only minimum payments on your credit cards;

Are having difficulty paying your monthly bills regularly and on time;

Are using your overdraft most months;

Are uncertain how much you own in total;

Are using credit because you don't have the money for everyday expenses

Have arguments about money that cause family problems;

Are charging more each month than you pay on credit;

Are over your borrowing limit on your credit cards, overdraft or line of credit;

Have credit collectors calling;

Are considering consolidating your debts.


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