What I wish people knew about bankruptcy | It’s not as uncommon as you think

We previously wrote about the shame people often feel about the financial situation they’re in, which can cause them to keep secrets about their financial problems. People who file a bankruptcy or a Consumer Proposal don’t usually broadcast this information. Unless you’re owed money from the person, there’s no reason you will find out they’ve sought debt relief unless they tell you. This can lead people who need relief from their debt with the impression that no one else around them has had to seek help with their debt, which can in turn leave them feeling as though reaching out for help is unnecessary or wrong. These feelings often cause people to delay reaching out for help, meaning they suffer with the stress caused by overwhelming debt long after they could have gotten assistance.

Let’s discuss the facts

There are several ways someone can get relief from debt that’s overwhelming. Some of these options, like a consolidation loan, asking for more time to pay, or tapping into house equity, do not involve making a formal insolvency filing. Those options tend to be useful for people who got a little behind due to a temporary situation or disorganization, but have a good steady income or significant assets. It’s likely that most people you know will have to overcome a situation like this at some point in their lives, whether you know it or not. However, when a setback lasts longer than hoped or there is no financial cushion, these options might not be available or successful at fixing the problem. In that case, a bankruptcy or a Consumer Proposal may be the right option, but it can be overwhelming to start looking into these options when you don’t know anyone else who has gone through it.

Although… you may want to think again. Chances are, you know several people who have made a bankruptcy filing or a Consumer Proposal you aren’t aware of.

In Canada, over 2.3 million insolvency filings were made by individuals from 1987 – 2021, according to statistics provided by the federal Office of the Superintendent of Bankruptcy. Doing simple math*, that’s about 6% of Canada’s population. 216,953 of the insolvency filings by individuals during that period were in Alberta, which works out to about 5% of Alberta’s population.

Based on this information, it’s possible that 5 or 6 out of every one hundred people you know or come across in your day have filed either a bankruptcy or a Consumer Proposal. It’s just that many of them won’t have told very many people, if any, about it. 

If you think this is unlikely because of the type of people you surround yourself with – perhaps they are young, live in nice houses, or have good jobs - you’re probably wrong.

Insolvency can happen to anyone. Here are some more facts:

In 2021, here’s who made insolvency filings:

Age group

• Ages 18 to 34: 25.1%
• Ages 35 to 49: 36.1%
• Ages 50 to 64: 26.1%
• Ages 65 and over: 12.7%

Gender

• 49.4% female
• 50.6% male

And while the available government-provided statistics don’t allow for much further analysis, we can report based on our experience that individuals who make an insolvency filing span a large array of professions, ethnic groups, education levels and family sizes. There are a large number of reasons a person ends up in financial distress, meaning that it can happen to anyone.

Another reason you might not suspect that someone has been through an insolvency filing is that you haven’t noticed a major upheaval in their lives. You may think it would be obvious to an outside observer that someone has made a Consumer Proposal or bankruptcy filing because they’d have to give up their cars and house and they’d suddenly start struggling to buy groceries or keep their children clothed. The truth is that even in the case of a bankruptcy many people don’t lose any assets for various reasons discussed here. And government regulations allow individuals who’ve made an insolvency filing to keep a certain amount of their income to cover living expenses. In the case of a low-income individual, this could amount to keeping the entire amount of their income. In reality, bankruptcy or a Consumer Proposal sometimes makes it easier for a person to make ends meet, as they will no longer be subject to creditor actions like wage garnishments or be caught in a payday loan loop.

The fact is, relief from overwhelming debt is an important part of a well-functioning financial system, so any effective government will ensure that honest people who are insolvent (meaning their debts are higher than their net assets and/or they cannot keep up with debt payments when they are due) are eligible for this relief. That includes people you would never suspect could struggle with debt.

*The math isn’t simple. Some people make an insolvency filing more than once, so the total number of individuals who have filed is lower. On the other hand, the population was much smaller in 1987, and has grown over time, so the number of people who have made an insolvency filing as a percentage of the population over that period is underestimated. Our simple math isn’t perfect, but we think it is a decent approximation.

Why is this important to know?

We aren’t suggesting that going through an insolvency filing is easy, or that it’s a step that should be taken lightly. An insolvency filing can, in some cases, be disruptive to your life, and your financial situation could feel worse instead of better in the short term after a filing. Being relieved of the responsibility to pay legitimate debts should be a last resort. But when it simply isn’t realistic to pay your debts within a foreseeable timeframe, it’s important that you consider all of your options, including potentially making a formal insolvency filing. Sometimes, it is the only way to relieve destructive stress and give you the breathing room to become financially stable, while providing a fair deal to your creditors.

When an individual doesn’t get relief from their stress, it isn’t just bad for their psyche, it can also be bad for their health, as we discussed in a previous blog. And in turn those health problems tend to make their financial situation even worse. This is why it’s important to get advice on your options as soon as you start to struggle with your debt.

When people put off dealing with their debt or refuse to consider options that will actually fix their financial problems because they’re ashamed or think the relief available isn’t meant for them, they suffer unnecessarily, their creditors are put to undue expense trying to collect, and the economy suffers. I wish people knew it didn’t have to be that way.

Charla Smith & Company Ltd. is a Calgary-based Licensed Insolvency Trustee serving the southern Alberta region. We regularly provide advice to individuals who are considering bankruptcy. If you are struggling with debt and want to explore your options, we can help.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.