Canadian December bankruptcy filings fall

Canadian consumer bankruptcies in December were down 8.7% from November. This marks the third-consecutive, monthly decline in consumer filings and the lowest monthly decline since August 2008. Total consumer bankruptcies were down 1.0% compared to December 2008 but finished calendar year 2009 up 28.4%. Business bankruptcies fell 7.7% in December capping the year’s overall decline at 12.1%.

The continuation of the downward trend in consumer bankruptcy filings appears to be an increasingly positive sign that Canadian households are getting a better grasp on their finances, especially when paired with the decline in consumer proposals (an alternative to bankruptcies that is carried out by a trustee and allows for the renegotiation of individuals’ financial obligations), which fell a substantial 16.8% in the month.

Amendments made to the Bankruptcy and Insolvency Act (BIA) in September were designed to “encourage restructuring as an alternative to bankruptcy.” The changes were expected to have little effect in the number of total insolvencies (bankruptcies plus proposals), but they would shift the composition toward more proposals and less bankruptcies. Therefore, the drop in bankruptcies by itself does not necessarily indicate an improvement in household finances, but the decrease in total insolvencies in December does appear to provide a real positive signal. The Office of the Superintendent of Bankruptcies notes, however, that over the last 20 years “monthly variations between November and December have been negative,” meaning that historically the number of December filings has been lower than filings in November.

For 2009, consumer bankruptcies increased 28.4% and total insolvencies increased 31.0%, to record highs of 116,381 and 151,712, respectively (a rate of 5.6 insolvencies per 1,000 Canadians aged 15+), as individuals struggled to manage their record-high debt loads under a tough economic landscape.

While households had a rough year, Canadian firms weathered the economic storm with surprising resiliency because business bankruptcy filings fell again in December. Canadian businesses continue to buck the trend of previous recessions by avoiding bankruptcies. This is a continued testament to firms' ability to manage debt levels leading up to economic downturn, effectively manage costs through the recession and maintain substantial liquidity buffers against economic shocks. For 2009, total business bankruptcies fell 12.1% to 5,420, marking the eighth-consecutive, annual decline in filings and the lowest level of annual business bankruptcies since data began being tracked in 1981.

David Onyett-Jeffries, Economist, RBC Economics