Profiles of Canadian Households Undertaking Insolvency Procedures Pre– and Post–Recession

by Karen A. Duncan, Janet E. Fast and Phyllis Johnson

May 15, 2012


Note: While abstracts are available in both English and French, some research papers are only available in their original language. This document is only available in English.

Abstract

In the years just prior to the 2008–09 recession,Footnote 1 the financial condition of Canadian households was characterized by rising incomes, low unemployment, low savings rates, and rising levels of debt. Average real disposable household income increased as the economy expanded from 2004–08, the first period of significant income gains for households since the previous recession of the early 1990s (Sauvé, 2011). Employment rates were the highest they had been, and the unemployment rate, at 6.1% in the months prior to the start of the recession, was near its lowest recorded level (LaRochelle–Côté & Gilmore, 2009; Sauvé, 2010).

There is evidence that consumer insolvency procedures – both bankruptcies and proposals – increased during and after the 2008–09 recession (OSB, 2009, 2010b), but it is not clear whether the profile of insolvent households changed as a result of the recession. Timely information on how the profiles of insolvent households are changing is needed by the insolvency community to provide benchmark data on Canadian households that have undertaken an insolvency procedure, to anticipate changes in demand for insolvency procedures, and to inform preventative and rehabilitative efforts for financially distressed households. Warren (2003) notes that information on who is filing for bankruptcy provides insight into the economic vulnerability and the economic progress of diverse subgroups of the population. Despite the importance of such information, relatively few studies have focused on the profile of insolvent Canadian households.

The overarching objective guiding the research is to determine whether the profiles of households of insolvent debtors have changed post–recession, and if so, in what ways. The research questions are:

  1. Have the sociodemographic characteristics of households that have undertaken an insolvency procedure changed in the post–recession period, compared to the pre– recession period?
  2. Have the financial characteristics of households that have undertaken an insolvency procedure changed in the post–recession period, compared to the pre–recession period?
  3. Have the banking practices, that is, the debt owed, of households that have undertaken an insolvency procedure changed in the post–recession period, compared to the pre–recession period?
  4. Have the major reasons for insolvency changed among households that have undertaken an insolvency procedure in the post–recession period, compared to the pre–recession period?
  5. For those liabilities where a significant change is observed between 2007 and 2010, what sociodemographic and financial characteristics are associated with the liability?

For each of the five research questions, debtors undertaking a consumer proposal were examined separately from those undertaking a bankruptcy.

Method

A random sample of 8,000 consumer insolvency files was drawn by the OSB; 4,000 from the calendar year 2007 and 4,000 from the calendar year 2010, thus the sample was drawn from a full year of data prior to, and a full year subsequent to, the technical start and end dates of the recession. Variables were selected from the Income and Expense Statement (Form 65) and the Statement of Affairs (Form 79), two forms that must be completed and filed with the OSB for each insolvency. All dollar values in the 2007 sample were adjusted for inflation, such that all dollar values reported in this study are in 2010 dollars.

The sociodemographic variables available in the data were age, gender, marital status, household size, number of dependents under the age of 18, province, occupation, whether the debtor had operated a business within the past five years, and whether there was a prior consumer proposal or a prior bankruptcy.

Financial characteristics were monthly income from employment, self–employment, pension annuities, child support, spousal support, employment insurance benefits, social assistance, and other sources of income, and such derived variables as personal annual income, and household annual income. Liabilities owed were mortgage debt, bank loans, finance company loans, credit card debt (bank and trust company issuers), credit card debt (other issuers), taxes owed, student loans, loans from individuals, other loans, and payday loans.

Reason for insolvency included all reasons reported by the insolvent debtor; this variable was coded by the OSB. The reasons were grouped as follows for analysis: overuse of credit, unemployment, insufficient income, relationship change (marital breakdown, supporting relatives, and moving), liabilities (tax liabilities, business failure, cosigning loans, student loans, gambling and poor investments), and health problems (health concerns, accidents, and substance abuse).

Bivariate analyses were used to address the first four research questions. To compare the sociodemographic characteristics of insolvent debtors between 2007 and 2010, Chi–square tests of significance were performed. To compare the different sources of income and the levels of liabilities, mean values were calculated and t–tests for differences in means were run. To compare the major reasons for insolvency, Chi–square tests and Fisher’s exact tests were used, as appropriate. For all comparisons, bankruptcies and consumer proposals were analyzed separately.

To address the final research question, those liabilities that showed significant differences pre and post recession were selected for further analysis. Logistic regression was used to examine which sociodemographic and financial characteristics and reasons for insolvency were associated with the likelihood of having the particular type of debt.

Findings

The proportions of insolvencies that were consumer proposals shifted between 2007 and 2010: Where consumer proposals constituted 17.4% of insolvencies in 2007, they made up 28.6% of insolvencies in 2010. In both years, more of the respondents had than did not have bank loans, bank credit card debt and other credit card debt, while more of the respondents did not have than had mortgage debt and student loan debt. Given that they have filed for bankruptcy or a consumer proposal, one might expect that more would have than not have each type of debt. Reasons why fewer insolvent debtors have than do not have mortgage debt are not known. Some potential explanations include: inability to qualify for a mortgage due to insufficient income and/or high levels of consumer debt, inability to save for a down payment, having sold their home due to their financial situation such that they no longer have a mortgage, or having paid off their mortgage.

In the bivariate analysis, age, gender, region, main activity, operating a business within the past five years, and household income differed significantly between 2007 and 2010 for bankrupt debtors, whereas gender, number of household members, main activity, and household annual income differed significantly for insolvent debtors who filed consumer proposals. Insolvent debtors were older, more likely to be female, less likely to be from Ontario and more likely to be from Quebec, less likely to be employed, more likely to be self–employed or unemployed, and more likely to have operated a business within the past five years in 2010 than in 2007. Proposal filers were more likely to be female, less likely to be from one–person households, less likely to be employed, and more likely to be self–employed or unemployed in 2010 than 2007.

The trend toward older age mirrors the trend of an aging population, although insolvent bankrupt debtors tend to be older on average than the population. The shift toward higher proportions of female insolvent debtors, the continuation of a trend identified by Ramsay (1999) and Schwartz (1999), brings this proportion closer to the proportion of women in the general population.

In the multivariate analyses, the debts that differed significantly between 2007 and 2010 – bank loans, bank credit card debt, other credit card debt, mortgage debt, and student loans – were analyzed. The results painted a more nuanced picture of the role of the variables that were significant in the bivariate analyses. For bankrupt debtors, being older was associated with the probability of holding other credit card debt in both 2007 and 2010, and being younger was associated with the probability of holding bank loan debt in 2007 and student loan debt in both years. Men were more likely to have bank loan debt in 2010, and women were more likely to have bank credit card debt in 2007, other credit card debt in both years, and student loan debt in both years. There were no age or gender effects for mortgage debt. For insolvent debtors who filed proposals, gender mattered only in the equations for student loan debt. Women were more likely to hold this type of debt than men in both 2007 and 2010.

Operating a business within the past five years was associated with a higher probability of holding bank loan debt and other credit card debt in 2010 and bank credit card debt and mortgage debt in both years for insolvent debtors who filed for bankruptcy. Although the effect of region varied depending on the type of debt, in both 2007 and 2010 bankruptcy filers from Quebec were less likely to hold bank loan debt, other credit card debt, and mortgage debt, bankruptcy filers from Atlantic Canada were less likely to hold bank credit card debt and more likely to hold mortgage and student loan debt, and filers from British Columbia were less likely to hold other credit card and student loan debt than filers from Ontario.

Identifying other potential variables associated with types of debt for those declaring insolvency is necessary. The debt levels were all measured at the time of filing for bankruptcy or consumer proposal. Retrospective data of how and when these debt levels were accumulated might provide insight on the current debt levels. Also, identifying how debt, savings, and assets have interacted in the five years prior to insolvency might provide further insight on current debt levels. The employment history of insolvent debtors, its stability and the adequacy of income provided, is also relevant.

Conclusions

The purpose of this research was to determine whether the profiles of insolvent households – those declaring bankruptcy and those filing proposals – changed as a result of the recession and, if so, in what ways. Because changes to the Bankruptcy and Insolvency Act came into force in September 2009, we cannot answer the question cleanly; however, there is evidence that economic conditions affected debtors in financial distress.

In the bivariate analyses, change in economic conditions may underlie the observed increases in the citing of unemployment and business failure as reasons for bankruptcy. Unemployment as a cause of bankruptcy was also associated with the likelihood of bank loans, bank credit card debt, and mortgage debt in the multivariate analysis, and relatively large proportions of these insolvent debtors reported being unemployed or laid off at the time of filing. Business failure was not cited as a reason for their insolvency by large numbers of insolvent debtors, but it should be examined more closely in future research. We don’t know whether business failure refers to a business owned by the debtor or the business of the debtor’s employer, and it would be useful to make this distinction in order to understand the impact of business failure.

About 20% of the insolvent debtors in this study reported having operated a business within the past five years, and operation of a business was significantly and consistently associated with an increased likelihood of having bank credit card debt among all filers and mortgage debt among those filing for bankruptcy. Operation of a business was also significantly associated with an increase in the likelihood of bank loan debt both overall and in 2007 and other credit card debt in 2010. Further study of the impact of business ownership on insolvency is warranted. Research on family businesses has shown that family and business finances are highly intertwined (Haynes, Walker, Rowe, & Hong, 1999), and it may be that a struggling or failed business is the underlying cause of insolvency in more cases than the data suggest. Further, to the extent that small business owners pay for business expenses with personal credit cards, it would be useful to examine overuse of credit as a reason for insolvency more closely. Overuse of credit was the most commonly cited reason for insolvency among these debtors, but we cannot assume that overuse refers only to personal credit use; overuse may also result from using credit for the past or current operation of a failed business.

A prior insolvency, either a bankruptcy or a consumer proposal, was commonly associated with a lower likelihood of having bank loan or bank credit card debt. These results raise the possibility that a prior insolvency may make it harder for these debtors to qualify for mainstream financial products and push them toward the fringe financial sector.

Finally, although the increasing age of insolvent debtors is in line with an aging population, insolvent debtors appear to be "aging faster" than the general population. Insolvency in later life has serious implications for the ability of these financially distressed debtors to age well, and in particular, to remain independent in their later years. Research that builds on that done by Redish, Sarra and Schabas (2006) will be important in addressing insolvency in an older population.

In order to have a better understanding of who is at risk of insolvency, we need better data; either through the collection of information as part of the process of filing an insolvency procedure or through independent survey research. In particular, research that compares those who filed either for bankruptcy or a consumer proposal with those who were also in financial distress but did not is needed to better understand who is at risk for insolvency. In order to better support households in financial distress, longitudinal analysis of this segment of the population is needed to understand the antecedents of financial difficulty and the outcomes for these economically vulnerable households.

References

LaRochelle–Côte, S., & Gilmore, J. (2009, December). Canada’s employment downturn.
Perspectives on Labour and Income (Statistics Canada cat no. 75–001–X), 10(12), 5–12.

Ramsay, I. D. C. (1999). Individual bankruptcy: Preliminary findings of a socio–legal analysis.
Osgoode Hall Law Journal, 37(1 & 2), 15–82.

Redish, A., Sarra, J., & Schabas, M. (2006). Growing old gracefully, an investigation into the growing number of bankrupt Canadians over age 55. Retrieved from the Office of the Superintendent of Bankruptcy website: http://www.ic.gc.ca/eic/site/bsf–osb.nsf/eng/br01683.html

Sauvé, R. (2010). The current state of Canadian family finances: 2009 Report. Ottawa: Vanier Institute of the Family. Retrieved from Vanier Institute of the Family website: http://www.vanierinstitute.ca/family_finances

Sauvé, R. (2011). The current state of Canadian family finances: 2010 Report. Ottawa: Vanier Institute of the Family. Retrieved from Vanier Institute of the Family website: http://www.vanierinstitute.ca/family_finances

Schwartz, S. (1999). The empirical dimensions of consumer bankruptcy: Results from a survey of Canadian bankrupts. Osgoode Hall Law Journal, 37(1 & 2), 83–124.

Warren, E. (2003). Financial collapse and class status: Who goes bankrupt? Osgoode Hall Law Journal, 41, 115–146.


Footnotes

  1. 1 The Canadian economy was in recession from the first quarter of 2008 through the second quarter of 2009 (Bank of Canada, 2010). (back to footnote reference 1)

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