Personal Bankruptcies on the Rise
Posted by Gail | Filed under Credit Wise
While the press has been reporting the good news that business bankruptcies are down (11% in the first quarter of 2009), the flip side of the story isn’t so bright. People are desperate and personal bankruptcies are on the rise (up 57% in March and 36% in April, year over year.) Almost 100,000 people declared personal bankruptcy in from April 2008 to March 2009. That’s a lot of people who are throwing their arms up in the air and saying, “I can’t do this no more!” And that doesn’t include the over 27,000 people who filed consumer proposals.
An economist at the TD Bank was quoted on as saying he expects 160,000 people will walk away from their bills in 2009 and 2010. Since over 35,000 walked away in April 2009 alone, I think the numbers are going to be much higher.
Lotsa people will be up on their high horses when it comes to the increase in personal bankruptcies. There are the folks who want to chastise spendthrifts for making their beds of thorns. There are the people who have paid off their own debts who see bankruptcy as an “easy way out” for people who won’t take responsibility for their debt. And there are the lenders who will use the rise in bankruptcies as another excuse to raise their rates – “we have to” they’ll whine – when it was their own bad lending practices that put credit in the wrong hands in the first place.
Ultimately bankruptcy serves no one well. Bankruptcy is a lose, lose, lose proposition. Lenders lose. Borrowers lose. Corporations lose. But the reason bankruptcy exists is because there’s just no other way but to cut your loses and start fresh. Let’s face it, with unemployment at record highs, the economy in the dumper, and people carrying the highest levels of consumer debt ever, you just can’t get blood from a stone. Bankruptcy may be the only way to move forward.
Starting fresh is no walk in the park for those who have gone bankrupt. With crappy credit histories, they’ll see frost in hell before lenders will let them borrow at anything but the most exorbitant rates. That’s one of the penalties you pay for going bankrupt. And as bankruptcies rise, and lenders pay the prices of their hitherto irresponsible lending, the credit market tightens up even more, making it difficult for manufacturers to sell their stuff to people who have less “disposable income” because they have no more credit. Sales drop. Companies downsize. More people become unemployed. More people declare bankruptcy.
Not all debt can be discharged under a bankruptcy. According to the Superintendent of Bankruptcy, in Canada the following debts cannot be wiggled out from under:
- alimony payments and child support;
- student loans, if it has been less than seven years since you ceased to be a full- or part-time student;
- fines or penalties imposed by the Court; and
- debts arising from fraud.
And declaring bankruptcy won’t get you off the hook for a debt that’s been secured: a mortgage, a car loan, anything for which you’ve offered security. The good news is that if you can afford your monthly payments, financial arrangements can usually be made with a secured creditor.
For people with whopping student debt, if you have been out of school for at least seven years you can apply to have those debts discharged. The better news according to the Superintendent is that the Court can “order a release from the obligation to repay a student loan as early as five years after the bankrupt has ceased his or her studies if repaying the student loan will result in the person continuing to experience major financial difficulty (undue hardship) and if the person has made efforts to repay his or her loans.”
The key to moving through bankruptcy smoothly is to get yourself to someone who is smart, capable, efficient, and committed to helping you. Trustees are a dime a dozen these days, and as with everything else, all trustees aren’t good at what they do. So make sure you find someone reputable to deal with.
If you’re so buried in debt that you can’t keep up with payments and keep a roof over your head, then navel gazing and questioning the “ethics” isn’t going to get you to a place where you can take control of your life. A plan for how to fix the mess, and how not to do it again EVER will. Time to fish or cut bait!
May 14, 2009 at 7:23 am
I agree there are times when bankruptcy is the only way to go, so you can start over and move on…BUT, if you make that decision then you have to accept it and all that comes with it…that means NO MORE CREDIT, if you do manage to get a vehicle financed (and it won’t be through a bank) you will be paying a very high interest rate…very high…the responsibility needs to come before you take on the debt…banks do look at the pattern of savings a client has before extending more credit…just because you make a good living doesn’t mean all the credit in the world is yours…if you have nothing to show on your asset side for your great income it impacts your credit worthiness…at least in the eyes of a legitimate lender..so if the only place you can get more credit is through a finance company at a sky high rate that is a big red flag to you not to accept the offer…credit can be great if used properly but the consumer must be responsible…easy to blame the lender for poor lending practices blah blah blah, but each and every person out there has to take responsibility for the condition of their finances…have a plan, save a few bucks regularly, don’t spend more than you make, use credit wisely, get annual financial checkups with your banker, accept when enough is enough and you may have to wait for the next big item you want so you can pay for it with hard cold cash NOT credit!…credit has it’s purpose and is a great tool, but as with many things…less really is more….
May 14, 2009 at 8:38 am
I have to say that I’ve never been near bankruptcy but my personal feeling is this…I’d rather sell everything I have, downgrade everything I do and get my debt paid off before calling it quits. Talk to your creditors because most of them would rather receive some kind of payment than no payment at all and be out the money owed to them.
Since I know I have to LIVE with me, I would not be able to go this route without knowing I’ve done everything possible. It’s more of a moral issue than a financial issue, for me.
Sell, change, move, talk, do something … anything…just not bankruptcy. If you made the debt, then pay the debt…it’s just an easy way out.
May 14, 2009 at 9:03 am
Agree with the others on bankruptcy, with the possible exception of a messy divorce or medical issues completely blindsiding people. That’s just an unfortunate situation.
May 14, 2009 at 9:22 am
I wonder if there are any statistics out there indicating how many folk who file for bankruptcy file again??? and how many stay clean?
That would show in a small way how many learned valuable lessons throughout that process and how many did not.
May 14, 2009 at 9:34 am
@jolie:
I couldn’t find much (other than anecdotal evidence), but I did find this article http://www.ohlj.ca/archive/articles/37_12_mcgregor_berry.pdf
It states that at least prior to 1992, the recidivism rate for those filing for bankruptcy was about 10%. Unfortunately, I couldn’t find anything more recent…
This article, though, states that the current recidivism rate is about the same as back then (to my surprise, actually): http://money.canoe.ca/PersonalFinance/2009/03/24/8870561-cp.html
May 14, 2009 at 10:15 am
I agree with Elizabeth – if I was ever faced with bankruptcy, I would sooner sell every last thing I had and move back in with my parents before going bankrupt.
May 14, 2009 at 10:32 am
I have known a few people (friends and family) that have filed bankruptcy (or a consumer proposal) and know that for them it was the furthest possible thing from “an easy way out”. They did everything they could (sell, move, talk, change) to try and make things work and pay off the debt they owed but at the end of the day it just wasn’t enough. To top it off, most creditors practically dared them to file instead of negotiating. It’s unfair to judge everyone who is bankrupt with the same stereotypes.
When people get to the point of considering bankruptcy, the line between moral issues and financial issues are faded. Their thoughts, emotions, goals and fears are completely based on their financial instability.
Feel lucky that you have never been faced with or near bankruptcy/comsumer proposal as I can assure you, nobody I have witnessed go threw it was smiling and toasting to the “easy life”.
May 14, 2009 at 11:00 am
I am surprised that personal bankruptcies are not even higher. The easy availability of credit coupled with our incessant need for a very high standard of living has blurred the lines between our very understanding of credit and money. So many of us use the terms interchangeably. I have family members who will tell you that they have high disposable incomes, when in actual fact they have high credit limits. I know many people who view a new credit card as an extra bonus; an extra windfall that they have to go and spend. And this is not entirely their fault.
We live in a society where consuming is king. Just drive around and take a look. We have to have the bigger houses, the bigger and more cars, all the latest furniture and electronic gadgets. Trailers, ATVs, boats…you name it, we have all the toys. We are inundated with so much marketing and promotional material that we cannot have an original thought. Even our major entertainment, the television, is constantly sending us messages to consume more. “Sex and the City”, HGTV, TLC, Fine living…all about living the good life by spending more. Want to know the latest trends? Turn on the idiot box and watch your Visa scream out for you.
Most folks don’t even the very basics of credit. They buy into the “lending practices” of the banks; that they must “apply” and “qualify” to determine whether they are “worthy” and of good “character” to “borrow” money. Oh pluuuzzzze people. Banks are stores that sell money. Anyone who has ever worked in a financial institution knows all too well that they are in sales. The banks may very well like you to believe that you are “borrowing” money, and in many ways you are. But the mere act of borrowing means that you are BUYING the money. The cost that you are paying are the fees and interest rates that you are charged. The difference with money as an item that you buy is that the banks actually charge you different prices (i.e., interest rates) depending on a certain set of criteria. Criteria, I might add, that the banks developed and that we readily accept. This is what we mean by ill-contrived lending practices.
Oh, and don’t ever think that the banks don’t sell its money to people who are not in a position to buy it. Banks and lenders routinely buy what is known as “bad money” in the industry – lending to people who they would never ever ordinarily lend to. It the corporate world it is known as risk management. Think about it for a moment. Who does the bank make more money from? The high wage earner with a 800 credit score who pays her Visa bill every month or the low wage earner with a low credit score who makes minimum payments every month, and sometimes has to skip a payment in order to feed his family? That’s right folks. It is the low and underemployed hard working folks out there that banks make the most profit from.
Not everyone has the knowledge and the understanding of the complex marketing machine that is at work at our financial institutions. And whenever I hear people judge bankruptcy as a moral issue then I say score one for the big banks. Their marketing is working.
May 14, 2009 at 11:50 am
My comment above was not meant to offend anyone…and I apologize if I did..
However, I know people (friends of friends) that apply for every c.card knowing full well they can’t afford to pay for anything…just so they can go on another vacation or buy that set of golf clubs, etc, etc…
My comment was more directed at those people who say ,”Oh I’ll just rack up the credit cards until I can and then claim bankruptcy”…Trust me I know a few people like this…and it burns me to think that they are that moralistically inept .. and don’t get me started on BANKs…
Thx
May 14, 2009 at 12:26 pm
I think that it is important to point out that bankruptcy is not something that people can do, it is something that they have to do. For those who would rather sell off everything and go live with their parents (and hence make your financial problems your parents), when you declare bankruptcy that is what you do. You have to liquidate any assets that you have to pay your creditors.
The fact is to declare bankruptcy you have to have debt that far exceeds your assets and that cannot be paid. You simply cannot meet your basic needs (shelter and food) and pay your minimum debt requirements on your income. Why you find yourself in this situation is irrelevant in bankruptcy….it just seems to be important to those who feel that they are morally superior to others.
Bankruptcy is a last resort for most people and has been set up to provide people with a fresh start. A chance to begin again. And sometimes, we all need a second chance.
(And for those who wonder, no, I have never declared bankruptcy but have considerable experience in financial services and have learned that bad things happen to good people.)
May 14, 2009 at 2:15 pm
I have the flip side to these comments. I am related to 2 people that have done the bankruptcy thing. They did it like a sabbatical to the country, a cleansing of sorts.
Spend spend, spend, expand, expand, take financial risks — OH CRAP! Off to file for bankrupcy they go. They saw it as the price for living life, sure it was inconvenient, but not the end of the world, and so it went. First my mom (twice) then my sister.
Do they learn?
I’m afraid to say in this case, they didn’t, My mom is in one of those orderly payment of debt situations right now too (but almost done) and my sister is rapidly spending herself there again. Sis said she stressed about it all so much, she spent more to try to fix her business, and then when it happened and she pulled the plug, it was like a great weight had been lifted and she could live again, with much less stuff, and much less responsibility too, she saw it as cleansing…. and she stiffed her landlord, her suppliers, and worst of all, our stepdad with a huge co-signed business loan!!!!
She did start fresh, lived simply for a short while (except when she bought $200 hair extensions instead of paying rent) then started paying through the nose for credit (happily) and 8 years later she has a fine home, full of fine things, a nice car, 2 kids in great clothes and a good career, massive mortgage, and a large LOC secured on her home.
I see it and I cringe, I am shut down when I get on the topic.
They feel entitlement, they see the price tag and say “I need it, I want it, It’s only $50, It’s on sale, I deserve it, I work hard, my husband spends more than me…..” whatever excuse you can think of, they got it!
Bankruptcy is not only for the situationally desperate, it is also for the chronically slow learning people with lofty dreams of grandious lifestyles.
May 14, 2009 at 2:39 pm
People go bankrupt for different reasons just as people go on welfare for different reasons or choose to work 75 hours a week. Let’s just remember not to paint all person’s with the same paint brush simply because they can be classified as “bankrupt”.
Sure there are people who take advantage (that can be said for almost every social assistance program out there as well) but there are others that had no other choice, exercised every possible solution and learned the hard way what not to do again.
May 14, 2009 at 2:57 pm
I think Colin has really hit the nail on the head with his comments on banks. I live in a small town and my banker is also a friend. The lines of business are a bit blurred. I totally had an aha moment with his comment about banks selling money. People really do buy into the notion that they’re “qualifying” for credit when really they’re purchasing a product. I have absolutely no problem knowing if I can’t afford a new car or appliance but I sure feel good when I “qualify” for more credit. Qualifying doesn’t mean I can afford it though. Anyway Colin, very well said.
May 14, 2009 at 3:06 pm
I declared personal bankruptcy back in 1991, in my mid-twenties.
I had been very immature, irresponsible person with money, spent way more than I made, lived way beyond my means, ran up a few credit cards.
I had nothing to sell to raise money to pay off debt and was spending almost every penny I made trying to pay off the debt. All my credit cards had been revoked, any charge accounts I had had been closed. At times I had to borrow money from my parents to pay for the basics (rent, food, transit). I ate lots of Kraft Dinner.
All the money problems I had were self-inflicted, there was no one else I could blame them on. I was probably $15,000 in debt on a $20,000 a year salary.
I was getting calls from bill collectors who threatened me with lawsuits daily. I did not know that I could try to negotiate with them, all I was being told was that I had to pay the entire amount or else. They called me at home, at work, day or night, called my parents, my employer, my friends. I was intimidated, sworn at, harrassed and bullied for months. I was, to say the least, terrified.
I met with a trustee to discuss my options and it was agree that declaring personal bankruptcy was the best for me. I was SO ashamed, SO embarrassed, SO humiliated. The only person in my life who knew about it was my partner, and to this day he is the only one, I’ve never told anyone else (until here and now).
I had to return my car to the bank and for 7 months I had to track and report every penny I spent and pay a pre-determined percentage of my earnings to the trustee.
In 7 months my case went to court and I was discharged. During that time, between what I had to pay monthly and a lump sum payment I had received from a company pension plan, I managed to pay half of what I owed creditors, so each creditor got approx 50 cents on the dollar.
The bankruptcy was on my credit history for 7 years after the discharge, but in 1996 we were able to buy a house (mostly on my partner’s excellent credit) and after the 7 years was up I had no problem financing a car or attaining a credit card. Today I have excellent credit, money in the bank, no consumer debt other than a car loan.
Claiming bankruptcy was not the best experience of my life, but neither was it the worst, as it allowed me to restore my credit after time and taught me a valuable lesson about money and spending. I know I will never let myself get into that position again.
May 14, 2009 at 3:09 pm
For us, bankruptcy has been anything but “the easy way out.”
We filed mid 2002 and were released in late 2003. After you are released a note is put on your credit report and there it stays for 7 years. Not seven years after you first file, but seven years after you are released. To me, it feels like in November 2010 we will finally be able to hold our heads up again and meet people eye to eye. The embarassment has been the worst part. Consider this:
1) We have told very few people in our lives about our bankruptcy. Our parents know, our siblings know and that’s it. Our oldest, who was aware of what was going on at the time, was sworn to secrecy. We didn’t want our friends to get wind of anything.
2) In our first year our car had to go into the shop for warranty work and the dealership was renting us a car until it was fixed. The rental company wanted a credit card for security and we had to explain why we didn’t have one.
3) Try renting a place to live and convincing your new landlord that you’re good for the payments when that red flag on your credit is staring him in the face. We have never, ever missed a rental payment, but how is he to know that?
It doesn’t matter how we got there in the first place. We made our bed and we’ve slept in it for many years. It sucked and it was hard, but we’ve come out on the other side more knowledgeable, more responsible and today WE’RE IN CHARGE of our finances.
It was anything but easy.
May 14, 2009 at 3:42 pm
Leigh & Anon – you are the very people I am referring too. Thank you for sharing your stories and proving that when financial mistakes are made, you can learn from it. There is no shame in that!
May 14, 2009 at 4:15 pm
People make mistakes and sometimes there is no other way out then to declare bankruptcy. Some who declare learn from their mistakes others don’t.
Sometimes – those who declare bankruptcy have an observant child who swears they will never be in that situation no matter what life brings. I’ve seen bankruptcy as a young child, as a teenager, and as a young adult – my parents did not learn – I did.
I wonder – how come somewhere along the lines we are not taught “the lessons of Gail”. How come in school they don’t teach us what disposable income really is (the money left over after basics needs such as basic housing and food are met).
Sometimes I think the school system really messes up when they only teach English, math, science, and history – they need to add basic money skills into the program. I had that as a lesson growing up – and I learned it well. (Having your parents borrow your first credit card when you are 19 years old so they can go to Europe – they weren’t allowed credit cards due to bankruptcy – really hits the point home). Don’t get me wrong – my parents were good people – they were just complete idiots when it came to money.
Congrats to those who learn their lesson during and after bankruptcy – congrats to those who will never go bankrupt. And to those who look at it as a quick fix – may the laws change, so that those who declare bankruptcy multiple times are stopped from declaring it multiple times.
May 14, 2009 at 5:51 pm
You know, commenting on what you would do if you ever had to declare bankruptcy is tricky if you’ve never had to go through it. (It’s kind of like skinny people who’ve never been fat lecturing the overweight. It’s well intentioned but isn’t always effective.)
A wise person once told me, ‘You don’t solve a money problem with money.’There are times when a money problem, is a symptom of other personal issues which if not addressed will come at you again and again until you learn the lesson. It’s up to you, if you want to go around the “mountain” again.
We live in a society which judges us harshly on our “external” package. What we look like, what we drive, what we wear etc…. Someone may not have a problem with money, but they might have to “go around the mountain” in another area of their lives.
I’ve come to the point where I take responsibility for my personal “messes” and have come to realize that we should be gentler with one another.(not that anyone has been harsh here) After all, we are all dealing with unseen burdens and with encouragement, and some honesty from people like Gail who help us out, we can all get where we’re going.
May 14, 2009 at 7:55 pm
EchoLake- M Y mother had to use my credit card to reserve a flight once too! And my sister talked me into buying something online for her (those 2 are the ones that have been bankrupt and no credit cards).
When I was whining about the self-indulgent spending behaviour of these two, I wasn’t suggesting EVERYONE who goes bankrupt is like that. (Those are the only ones so close to me that I know the whole story is all. And it really is the whole story! Their spending is a symptom of their inner workings, not a healthy (nor realistic) balance when it comes to the ramifications of their shopping. It’s all or nothing with them…. – ALL – as in getting everything their little hearts desire, then – NOTHING – as in going through the scrutinty and control while being under the time for discharge. I personally can’t live that way, so I guess I learned from their mistakes…. not to say it can’t happen to me (knock on wood).)
May 14, 2009 at 9:27 pm
I too fall into the catagory of the bankrupt. I was saddled with a large debt from a previous relationship that I just couldn’t get a handle on, then in July of 2007 I got ill and was forced off work for medical reasons. I went from swimming in debt to drowning. Saddled with no income for 8 weeks, and medical expenses, I had no other choice. This is a secret, no one in my life outside of a close friend and my fiancee know what I did. I feel great guilt and shame for this, but there was no other choice. I don’t have family to move in with nor could I work 75 hours a week to pay it off. I have been released for a year. Living without credit is difficult but is able to be done. I am lucky, I have a partner with great credit. We already had our home, so that wasn’t an issue. I have learned the concept of budgeting and buying only what I can afford and save for what I can’t. I will NEVER go down that road again.
May 15, 2009 at 11:34 am
To sunflowermel:
It sounds like you have a reason for bankruptcy – not a case of over indulgent spend. Some things in life are unavoidable – try to overcome the feelings of guilt – lifes too short to carry that burden long term. Congrats on the new start.
May 15, 2009 at 6:16 pm
My husband and I split up last fall and I am staring down the barrel of bankruptcy. We have a house that requires our two incomes to service and he’s not the least bit interested in helping to preserve it. We have been caught in the bad situation of today’s housing market (Windsor Ontario) and little equity in the home because of a major reno job that could not wait two years ago (septic tank, roof). We had a plan in place to get to a certain point in our mortgage before we made the attempt to reno, but we got caught about 3 years too early. Once begun, it just didn’t seem right to go “halfway”.
Anyway, so now I have one income, a house I can’t sell (which is already in foreclosure) and two kids to take care of with NO help from him.
Oh, he knows he is supposed to be paying, but he uses every lawyer trick in the book to stall.
So, for me, bankruptcy is the only way. I can accept it. It’s not one that I am happy about, but it is the way I have to go.
I’m here to WARN anyone else out there, though:::::
IF YOU GO BANKRUPT AFTER SEPARATION, YOU WILL LOSE ALL CLAIM ON YOUR SPOUSE’S PENSION!!!!!!!!
This is because my claim to half his pension is handled as a buyout for the purposes of divorce; it becomes a debt that is absolved when he files bankruptcy!!!!!!
ALSO: JUST BECAUSE *HE* IS RESPONSIBLE TO PAY CHILD SUPPORT DURING HIS BANKRUPTCY, YOU ARE NOT AUTOMATICALLY ENTITLED TO IT DURING YOURS…IF YOUR INCOME MEETS THE LIMIT SET BY THE SUPERINTENDENT OF BANKRUPTCY, YOU’LL FORFEIT THOSE PAYMENTS, EVEN THO THEY ARE FOR THE KIDS….can’t be put in trust or RESP’s or anything.
Two rather shocking bits of information I received after my life went to hell.
be forewarned!
May 17, 2009 at 6:12 am
Well for all the supposed “stigma” of bankruptcy……….
One couple has been bankrupt and now have a house again and more charge cards!!!
May 17, 2009 at 11:26 am
They wouldn’t have those charge cards if a bank hadn’t approved it. As for having a house, I don’t think being a previous bankrupt should automatically mean you can’t own a home ever again… and for the sake of arugment the mortgage would be another thing that the bank would approve.
Perhaps the “stigma” being referred to is that from society and not from the corporate entities which ultimatly decide financially eligibility.
July 16, 2009 at 10:30 am
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