Bankruptcy North of the Border

A lot of people joke about Canada being our "51st state." (Not Canadians, mind you.) However, from a bankruptcy standpoint, our neighbors to the north are not all that different.

In the last few months, personal bankruptcy filings in Canada have surged 47 percent from the same time last year. In September, 12,305 people filed for bankruptcy and 3,160 people filed "consumer proposals," which is a component of Canadian law that allows people in debt an alternative to bankruptcy by negotiating the payoff of only a portion of their debt. That number increased 38 percent from last year.

In Canada, these statistics and the bankruptcy process is watched over by the Office of the Superintendent of Bankruptcy. According to its Web site, its role is to protect the integrity of the bankruptcy and insolvency system. It also oversees trustees.

Granted, the number of people needing to file is substantially lower than in America. However, the important thing to note is the percentage increase, which has the country quite concerned about the financial stability of its citizens. For the year, filings are up 36 percent. However, the last few months have demonstrated a noticeable spike. This means that things in Canada may be getting worse.

For the last several years, the total number of people who were insolvent (filed bankruptcy and consumer proposals) averaged around 100,000. In 2009, the number is closer to 150,000.

Just like in the U.S., Canada experienced a booming economy from 2005-2007. And just like in America, people bought homes, cars and ran up credit cards. Then came a slide in the nation's ability to employ. Now here is the scariest similarity between the two nation's increasing bankruptcy issues: new government legislation making bankruptcy more difficult prompted Canadians to file before the new laws took effect. In America, that happened in 2005. In Canada, it happened a few weeks ago, on September 18, 2009.

As expected, thousands of people rushed to file before the process became much more expensive to execute. And, their new law states that a person who files is required to report their income every month. The amount they need to pay back as part of the bankruptcy agreement is based on that number. Thus, the more you make, the more you have to pay.

Additionally, the Canadian government sets a limit on how much a person who has filed can make. Should a person surpass that limit, the remainder is forced into a "bankruptcy estate," or the trustee, who then distributes it to your creditors. Every month, one has to file paperwork with their trustee documenting how much was earned.

This surplus income rule also impacts the amount of time a Canadian is "in bankruptcy." Prior to September's new laws, a person could emerge from bankruptcy in Canada within nine months. Now, the surplus income rules stretch the bankruptcy period to almost two years.

As a result, more Canadians are turning to consumer proposals to avoid the high cost of bankruptcy.

Not unlike our recession, there is no clear predictor on when things will begin to shape up for Canada. Signs of improvement come and go but the building number of insolvency filings is worrying a number of economists, as is the steady rate of unemployment.

As it turns out, we have a lot more in common with Canada than hockey and Michael J. Fox. We also share a recent increase in insolvency and bankruptcy.