Friday, September 25, 2009

Unresolved [Canadian Bankruptcy System] Access Issues

Posted on Credit Slips by Stephanie Ben-Ishai:

Yesterday’s post on means-measuring versus means-testing offered a positive perspective on the Canadian bankruptcy reforms. The focus was on debtors who are currently able to access the bankruptcy system and how this will change with the enactment of the reforms. Unlike the American system, the Canadian surplus payment requirements do not impose additional front-end administrative and financial burdens that in themselves will prevent the poorest of potential bankrupts from accessing the bankruptcy system. However, a number of obstacles hinder access to the bankruptcy process for the poorest debtors. In particular, such debtors will have difficulty paying the approximately $1800 in costs associated with the administration of a bankruptcy. The reforms go some way to address this concern by providing a mechanism for the bankrupt to reach an agreement with the trustee to continue paying for bankruptcy services after the bankruptcy period.

Professor Saul Schwartz of Carleton University and I have been working on issues around debt, low-income households and insolvency remedies for some time now. Jason Kilborn blogged about our 2007 article at: http://www.creditslips.org/creditslips/2007/04/bankruptcy_for_.html. In that article, we pointed out that, for two reasons, the conventional wisdom is that the poor are not likely to have needed the insolvency system. First, creditors are reluctant to extend credit to the poor because the risks of non-payment are high. Not having been able to borrow, the poor are not over-indebted and are therefore not in need of bankruptcy protection. Second, some poor debtors - lone parents on social assistance for example - are judgment-proof meaning that judgments for money recoveries obtained by their creditors are of no effect because these debtors do not have sufficient non-exempt property or income to satisfy the judgment.

Developments in two areas challenge the conventional view. The “democratization of credit” has allowed borrowing even in the lowest income groups. Even a short-term, low-wage job can bring a credit card to the doorstep of the poor and the slogan “no credit, no problem” testifies to the availability of retail credit. In addition, we now know that poverty is often a temporary state for many Canadians, with many moving in and out of low-income. Accordingly, the judgment-proof state is not a permanent condition, but a temporary status for many. While this may be welcome news in some respects, it means that debts can be accumulated during periods of relative economic well-being only to go unpaid when a job ends or when hard times return. These developments suggest the possibility that some of those who are poor at any point in time are in fact in need of bankruptcy protection. They have debts that they are unable to pay and little likelihood of being able to repay in the near future.

We begin the paper by presenting evidence from the 1999 Survey of Financial Security on indebtedness among families in the lower income deciles. We then turn to the main question: should the Canadian bankruptcy process be more readily available to poor debtors? We draw on two sources to make this case: a) a comparative analysis (considering England and Wales, the United States, Australia and New Zealand) and b) a series of semi-structured interviews with Canadian bankruptcy trustees and other insolvency professionals.

We have a new article that is going to be published in the Spring 2010 issue of the Queen’s Law Journal entitled “The Role of Governments in the Overindebtedness of the Economically Disadvantaged.” We will have it up on SSRN very shortly. In this article, we examine several ways in which the government becomes a creditor of economically disadvantaged Canadians and its role in limiting the options available for resolving the resulting overindebtedness. Specifically, we explore how government transfer programs, and the debts that result from benefit overpayment, affect those already marginalized by poverty. We note that Jason Kilborn has studied the importance of debts to government in the context of European bankruptcy reform.

We then argue that the two main remedies available to Canadians facing insolvency — credit counselling and bankruptcy — are simply too costly for low-income individuals. Low-income Canadians coping with government debt are shown to be in a unique and difficult position with respect to repayment. Using the overpayments that can occur within transfer programs such as the Ontario welfare program (Ontario Works or OW) and the Ontario Disability Support Program (OSDP) to illustrate the particular issues affecting low-income individuals, we demonstrate the lack of recourse this group has when dealing with insolvency. We analyze this issue using the statutory framework, interviews with government program officials and data on social assistance overpayments to cast doubt on the assumption that those with low income have no need for bankruptcy and credit counselling. In so doing, we ultimately question whether existing insolvency remedies are serving the needs of all Canadians.

Still unresolved, however, is the question of how many Canadians have limited access to bankruptcy. We simply do not know whether there is a large pool of debtors who would seek bankruptcy is the price were lower or if the problem is limited to a small subset of debtors.

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