Lipstick on a Pig – Declining Bankruptcies

The Alberta Treasury Branch (ATB) earlier this month penned with glee that personal bankruptcies in Alberta are at its lowest point in nearly a quarter of a century (that sounds like a far longer time than 25 years).  The ATB opines that “the steadily falling rate of bankruptcies can be attributed to a strong economy, low unemployment and rising average weekly wages.”

What about the impact of the home equity exemption now being limited to $40,000?  Once considering the ‘paper gains’ many Albertans now enjoy due to the run up in real estate prices is it possible that many that should be going bankrupt are choosing not to?  Is it possible that this dynamic may also be contributing to supressing our artificially low bankruptcy rate?

Filing for a Consumer Proposal, a legal agreement under the Bankruptcy and Insolvency Act, that affords the indebted consumer the opportunity to repay a set portion of all debts (meaning your creditors agree to taking a haircut on the amount outstanding) over a 5 year period, is an alternative to bankruptcy should the consumer have assets which they would be in jeopardy of losing in the event of a bankruptcy filing.

Once considering that Consumer Proposals have increased each and every year since they were introduced, even when bankruptcies have been declining, expect this trend to continue.  For example, while bankruptcies may have decreased year over year from 2012 – 2013, Proposals have increased 5.4% nationally, 3.7% in Alberta and a whopping 13% in British Columbia!

According to the ATB; “There is no reason for panic about the solvency of most Albertans.  Interest rates remain low, so debt servicing costs for most individuals are lower than they were a few years ago.  According to the Bank of Canada’s guidance, interest rates are unlikely to be rising any time soon – giving even heavily-indebted Albertans some breathing room.”

One reason for the big change in the rate of Consumer Proposal being filed can be attributed to bankruptcy rule changes in 2009 that made filing bankruptcy in Canada more costly for some people.

So in retrospect then does the headline declining trend in bankruptcy filings really tell us anything?   From our vantage point you can put all the lipstick on a pig you want, but it’s still a pig.

But relax, don’t worry, be happy.  Perhaps this time it will be different because central bankers have now become accurate with their prognostications of the future and real estate values can now only go one way; up!