Canadian debt levels are well documented at this point, but we haven’t seen many problems arise – until now. Office of the Superintendent of Bankruptcy (OSB) filings show January was a big month for insolvency growth. Bankruptcies are declining across Canada, but more consumers are filing “consumer proposals.” The type of insolvency filing, designed to prevent full blown bankruptcy, has hit a new record pace of growth.
Insolvencies, Bankruptcies, and Consumer Proposals
Insolvencies are filed when people or businesses can’t keep up with their debt. There’s two types of filings recognized in Canada, consumer proposals and bankruptcies. A consumer proposal is an attempt to negotiate paying a fraction of what you owe with your creditors. Bankruptcies are when a Licensed Insolvency Trustee (LIT) liquidates your assets, and distributes them to your creditors. If you’ve got debt problems, hopefully you can tackle them in the consumer proposal phase. If it gets too bad, you’re going to have to go for a bankruptcy.
Total Insolvencies Increased Over 8%
The total number of insolvencies filed by consumers showed mild growth. The OSB received 9,308 filings in January, an 8.35% increase from the month before. Compared to the same time last year, this is a 2.93% increase. Let’s break that down, by type of insolvency.
Source: OSB, Better Dwelling.
Bankruptcies Are Down Almost 3%
The good news is consumer bankruptcies are down across Canada. OSB received 3,981 bankruptcy filings in January, a decline of 3.89% from the month before. This represents a 5.46% decline compared to the same month last year. Bankruptcies in Canada peaked in March 2011, and have been trending lower since.
Source: OSB, Better Dwelling.
Consumer Proposals Make Largest January Jump In Over 5 Years
Consumer proposals are exploding in growth across the country. OSB received 5,327 consumer proposals, a 19.73% increase from the month before. This represents a 10.24% increase compared to the same month last year. The 12 month increase beats the previous January growth record, set in 2013. Despite being a less severe form of insolvency, it’s still not great to see these numbers climbing.
Source: OSB, Better Dwelling.
Consumer proposals surging is by no means a good sign. It shows consumers are increasingly looking for debt relief early on. Good for them, they’re solving debt problems before they get too bad. Bad for the economy since these consumers are going to have to reduce consumption. An economy run by debt driven growth is going to have a tough time chugging along.
We’ve only seen mild increases to interest rates, and insolvency growth has returned. As rates continue to normalize, this segment is primed for growth. Kind of a big deal for real estate markets, considering what debt experts have been observing.
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That’s not good. Any idea how many of these people have real estate? We could see defaults start to rise soon.
The answer is ‘a lot’…people aren’t restructuring their debt because their Best Buy credit card rate went up. People with no assets, like a house, just go bankrupt and start again. People who restructure are doing so to save their assess…I mean assets…
😂
Yes, houses are the last thing sold when going through bankruptcy. The belief is that you can’t discharge mortgage debt. Maclean’s had an article recently that said this is not the case. Now that it’s known, I real estate debt isn’t as secure as people think.
http://www.macleans.ca/economy/realestateeconomy/heres-how-canadians-could-walk-away-from-their-homes-if-house-prices-fall/
I believe people will fight tooth and nail to keep their home, very embarrassing and disrupting to you and your family to get evicted. That being said, if it become apparent that a big correction/crash is underway, one where prices might take 10-20 years to fully recover (adjusting for inflation), what will be the better financial decision? Struggle under you debt load for multiple years or declare bankruptcy, immediate debt relief, 7 years to get a fresh score and to buy back in?
I think younger owners (no family) are more likely to choose the later than older ones, but many may not have the choice. Debt loads are insane. It will be interesting to see how this plays out.
Not to mention that those who overleveraged themselves to buy multiple properties for speculation are driven by a different logic and will have to deal with much more severe math.
Yes those with multiple properties stand to get completely wiped out if those properties cant support themselves. IE cash flow positive, low turnover/ high demand area, and enough of a spread to handle increased interest rates. Otherwise…….BANG!
In my opinion the condo market (first time home buyers) should be the first segment to suffer a correction given a high interest rate environment. They should represent an alarm bell for the other markets. People in this segment are generally less invested therefore they have less to lose (lower mortgages, no kids, younger demographics).
The population cohort of middle age individuals/families would cut all expenses, roll out debt before they are forced out their primary residency. It is too disruptive to leave and generally more expensive (short-term view). Lower impact on monthly cash-flow as you can continue to accumulate debt (interest only loans, additional debt…).
To analyze this scenario, I try to think my own reaction if I was in this type of situation. I would use additional debt to postpone my judgment day. Changing my kids from schools, adapting to a much lower living standard would be hard on our family (rental market that would accept you as a tenant after going a bankruptcy process… )
Therefore I think there will be an important time gap between a correction in the condo market (studio, 1 bedroom) and the possible a important correction in the detached/semi-detached/townhouses.
That’s a fine theory that is crashed by the reality of detached marked in Toronto entering correction a year ago. The unwinding of this speculation ponzi makes it practically impossible to predict how exactly this jenga will be coming down.
BTW, here is a fun fact I came across recently. It turns out that 25 years after its peak, Tokyo real estate is still more than 50% cheaper today.
I also assumed the cracks would first emerge in the condo sector. I still think there is some merit to that. Yes detached has been correcting but the RE industry keeps pointing to the condo market to explain why prices will start growing again very shortly. Right now they are able to say that SFH can only drop so much compared to condos before they have to start going up again. There is truth to that, SFH will always be more expensive then condo and with condos still showing growth it does put a floor on SFH declines (perceived floor)
Once condos start to fall then that perceived floor for SFH gets throw out the window, and the whole RE industry narrative gets completely throw out. Condo market is preventing a full blown panic.
What do you mean by real assets? Real assets like real estate? that is “under water” in another words: mortgages/HELOCs being at higher amounts than value of the houses? (905) down by 35% on valuation, (416) down by 17%, (778) pending due to severity of RE addiction.
I am ready to take orders for the new Got Debt? T shirts. Made in Canada =)
Your poorer than you think…..(that goes on back)
love it, I’ll take 2 in medium.
Haha, I’m going to the real estate wealth expo this Saturday. Get some advice from Rocky and Pitbull! Would love to be wearing that shirt
On one hand, I feel sorry you’re going to that. On the other hand I’m insanely curious what the other side is saying.
LOL. Yeah part of me feels guilty about supporting events like this, I am just dying to see how they spin things this year. Also look at it as a bit of a social study……….. what types of people/ what makes people want to commit financial suicide.
I’m predicting a lot of “Don’t listen to the doubters, all losers who will never make money” “No risk no reward”……….. yada yada yada.
You do realize that if that thing hits the fan badly, none of us will be spared? You would hope that only the delinquent ones will feel the pinch, but trust, the rest of us in every corner are going to be dragged down as well.
Please report back, Griz.
Do you take credit?
. . . dummer too buy buying in to real estate debt post 2002 levels. Greed is contagious. You got what you deserve.
One good thing with foreign buyers, they won’t be impacted by the loss of jobs. It’ll help mitigate property losses.
Very true. their underlying asset/investment will take a haircut. Within 8-12 months the rent they could charge goes down as the entire market retracts. Oh and don’t forget, if the foreigner is chinese, Xi is sucking is $$ back and transparency is gone so no more funny money (they could have their assets stripped overnight, fun times, go emperor xi!!) The foreigners start to freak out and considering all they wanted to do was get their money out of their country, they jump ship and have to discount their assets even further. I’m pretty sure we’ll see all the rats jump ship in the next 3-6 months. Great comment, keep it up!…wait, did you say ‘Help mitigate property losses’ or ‘completely fuck the foreigners who took part in this market run up’? If it’s the latter, ding ding, you win!
What rent? Walk around Kerrisdale, Shaughnessy, South Granville, Point Grey and Dunbar at night. They are dark. The houses are empty. No renters.
These are very safe cash parking spots. Xi doesn’t know about them and has no means of finding them. Our governments have no idea who owns them. Why jump ship? Where are they going to put the dollars? Every other jurisdiction has transparency – we are the only place that allows them to hold tens of millions of dollars in property in total anonymity. Swiss banks don’t have the same allure, as they aren’t real property.
If the foreigners in Vancouver ever started selling, the whole dynamic here would change overnight. They drive everything at the margin. I believe it would have an exponential impact on prices. But I have seen no evidence of it happening. Does anyone know of even a single sale where a seller has been in the red?
Foreign buyers can’t hold up a market alone, and will actually bail *much* faster than residents when the prices and volume start tanking, which further accelerates the downturn. It’s why Vaughan alone is down just over 20% in price and the graph is literally pointing straight down… because there was an extreme amount of foreign buyers in that city (if you look on MLS/Zolo you’ll notice that 9/10 houses listed in Vaughan are just empty structures).
Also note that currently even with an over 20% drop that actual sales are being made 5% under *that* drop, which is insane.
I thought we wouldn’t see these numbers jump until the late summer or early fall which would lead into a recession in early 2019. Since this is happening earlier, in my opinion, my concern is the restructuring is an attempt to delay the eventual default and allow over-leveraged consumers still play the roulette wheel. I honestly don’t know enough about debt restructuring and whether a banks/lender will just let you bleed out or would force asset sales to ensure full repayment of the newly agreed debt obligation? Need to do some digging.
With a consumer proposal the person filing will have no access to the credit market. If they miss repayment than the proposal itself is cancelled and the person now assumes the full debt once again, which generally ends up with bankruptcy as the only option.
Thanks Joe! Very helpful. From what I was just reading while on an individual basis there is nothing wrong with debt restructuring and it is in fact a good thing vs bankruptcy/insolvency. A problem arises when a large cohort restructures as it kills short-term spending, accelerating a recession, and in many cases the consumer who restructures still defaults. Just prolonging the inevitable. Tick tock.
Exactly this. Basically in a proposal a person offers their creditors X cents on the dollar, and even with that restructuring they will still pay a large percentage of what they owe. It definitely cuts down on spending as credit is not available to them, and also they need to actually make the payments, whereas many were missing them previously. When these filings go up, as well as bankruptcy for that matter, it begins to strain the economy due to a spending slow down. So it definitely accelerates and can even prolong a recession.
‘Consumer Proposal’ agencies are ‘collection agencies’ in sheep’s clothing. They get a kick-back from the creditors for recovering some of their money, and the consumer is still stuck with the poor credit rating. They are the last step for a creditor to bleed more money out of the debtor, before the debt is completely cancelled in bankruptcy and the creditors get nothing. It’s like paying a collection agency up front to hound you to pay up.
If the debtor goes bankrupt at the beginning, they end up in better shape, not having thrown good money after bad, and then going bankrupt.
Actually you’re incorrect about being stuck with a poor credit rating. Immediately upon having the proposal accepted your report now shows being in a proposal, and three years after paying the amount it is completely cleared. So if someone were to pay it very quickly it will actually be cleared much faster than a bankruptcy, and you don’t have to check BK when applying.
You are stuck with the bad credit rating just as long as in bankruptcy. Your credit score drops just as much, and recovers at the same rate. Any institution that was involved in the action gets to retain the info for as long as they want, and can refuse credit for as long as they want, even after the record drops from your credit record. Just because it drops from the public credit file does not mean your credit is restored. Bankruptcy is discharged usually in a year. It is just as devastating as bankruptcy, as far as getting back a decent credit rating.
Plus the fact that you will pay back thousands, perhaps tens of thousands, more for much longer than by declaring bankruptcy. These credit proposals can go on for years and years – no real time limit. Bankruptcies can be discharged in a year, sometimes with no further payments in that year after the initial filing. When you declare bankruptcy, any income you get after that is probably going to be yours. You are allowed enough income to support a reasonable standard of living. In a consumer proposal, you are paying back all that income, and it is tied up for potentially years, up to 50% of your income, no matter how meager.
Consumer proposals are just a means of sucking more money out of you, for the creditors.
Talk to a trustee in bankruptcy to get the real picture.
It’s not black and white, and bankruptcy is not always the better option. If you can manage a proposal over 36 months or less, then the proposal is probably the better option, as long as you aren’t paying back more than 60% of the overall debt load (including the trustee’s fees, usually about 20% of the total repayment amount). Sometimes the best proposal the creditors will accept is 70% repayment (including trustee fees), over 60 months. That’s way too high and way too long. If that’s the best deal you can get, you’re probably better off rolling the dice in bankruptcy court.
Alistar, thee are no trustee fees in a consumer proposal. it is not the same as bankruptcy, and the rules are not the same. Bankruptcy is enforceable by the courts, a consumer proposal is not.
If you end up bankrupt after a consumer proposal, you are almost always much worse off than if you went directly into bankruptcy. Bankruptcy has a zero interest rate, consumer proposals are not legislated to zero percent. In a bankruptcy, ALL creditors have to cease and desist. In a consumer proposal, only the ones who agree to it will back off. Consumer proposals continue to suck you dry, perhaps for years. Anything more than a one year period is a waste of money – good money thrown after bad.
By and large, consumer proposals are only good for those lightly in trouble, with cash flow problems, and no garnishees. Anyone in deep trouble should go directly into bankruptcy. It is the only way to stop the vultures.
Best to get it over with at the beginning, instead of dragging it on and on and on.
It is very important to differentiate between so called “credit counsellor” agencies and licensed insolvency trustees (LIT). The former charge high fees for doing nothing but complete an intake form, do an initial calculation and then hand the person off to the LIT.
A LIT is a licensed professional who will do the part described above for free as part of a free initial consultation and is licensed and supervised by the Government of Canada to administer consumer proposals.
The Superintendent of Bankruptcy has recently taken steps, through new rules for LITs, to stem the use of the agencies you are referring to Justin Thyme. You are correct that those agencies do not provide a real service and make people who cannot afford to pay extra fees, do just that, pay extra unnecessary fees!
I just wonder if anyone took out credit to buy Bitcoin in December.
Lol….. I know a few, and they work in the banking sector. You think they would have known that bitcoin is backed by nothing but hot air.
An ass is born every minute, hopefully this is all adding up to a nice cheap foreclosure.
I heard stories of some people taking out a second mortgage just to buy Bitcoin futures back in December.
Well if crypto can’t only go up, at least my house will!
Can someone help me? which is the best website to do property research? I am using zolo these days.
Bankruptcies only started to go down when house values skyrocketed.
Now, with B20 and falling house values, you will see bankruptcies start to rise again.
Does this really demonstrate any change in the economy, or is it simply due to an increase in high-pressure advertising techniques of the ‘Consumer Proposal’ industry?
You know, the ones advertising ‘An easy way out of debt’, but for a very large fee?
Some of these firms are rip-off fraudsters, and you usually end up paying far more than you would in bankruptcy, with the SAME damage to your credit rating. They just have a better ‘hard sell’ than the trustees in bankruptcy, who are usually far more ethical, and definitely more on your side. ‘Consumer Proposal’ agencies are just a ‘Collection Agency’ in sheep’s clothing.
If i was in the consumer proposal industry I would be trying to grow my network as much as possible right now. Business should be booming in the near future.
That being said, for them to try and start a campaign to flip general opinion it would require them to outspend and outfox the RE industry…….. who have way deeper pockets (at least for now)
Taken in light of the fact that we are seeing an uptick here right after rising rates, stagnating prices, and the stress test I do think this an early indicator of coming changes to our economy. Could just be a coincidence though.
They aren’t “consumer proposal agencies” they are licenced bankruptcy trustees; they handle both proposals and bankruptcies and they make money either way.
No they are NOT the same. Different regulations. One needs certifications, the other doesn’t.
I agree with you 100% Justin Thyme. The only thing I would add is that when Parliament introduced consumer proposals, it was in order to reduce personal bankruptcy. It is a means to allow a person with limited income and assets, a tool to avoid bankruptcy that was previously only available to either people with higher incomes and assets and corporations wishing to restructure.
So, it looks like the legislation is working, if consumer proposals are up and personal bankruptcies are down – for now anyway.
Off topic but somewhat related, has anyone taken a look at Richard Vague’s site ?
http://debt-economics.org/review-data.php
Click on the drop down list that says “Historical Debt Data for Top GDP Countries”.
Then download Japan and Canada. Then compare where private debt levels were in Japan in 1990 at the start of their crisis vs. where private debt levels were in Canada in 2016. What the hell, I’ll do it for you:
Japan 1990: Private debt as % of GDP – 213%
Canada 2016: Private debt as % GDP – 213%
Don’t worry though. It’s probably just a coincidence.
I can not imagine any mortgage holder agreeing to a consumer proposal. They are used by unsecured creditors only. Second and third mortgage holders, perhaps, if the first mortgage holder has foreclosed and sold the property to get back their equity and has left the other mortgagors on the hook. But only because they want to avoid the debtor from going bankrupt, in which case they would lose all of their money without further recourse.
From the article that Walt linked to (above):
“‘If we were all buying a second or a third condo with confidence that it was going to rise in price, and sell it to someone else, that would be one of the ingredients you’d expect to see in a true bubble’, Poloz said.”
Poloz IS aware of what’s going on, but he’s like that German guard in Hogan’s Heroes: “I see nothing!”
He’s got instructions from his handlers (no, Poloz is not impartial) to keep the party going as long as he possibly can. He should be in jail.
Sgt. Shultz
https://en.wikipedia.org/wiki/John_Banner
Another poster posted this link. I don’t know if it’s true or not, and it might not be, but if it is true, then my mind just got blown.
“According to this Garth has flipped 50 properties over the last few years. His current flip has been for sale for nearly a year and has been reduced by $250K already.
Turner, you may be surprised to learn, is also a self-professed real estate junkie who over the years has bought and sold—very profitably—about 50 commercial and residential properties; he moved four in 2011 alone. And considering this house sold around $1.5 and closed in December 2016 only to undergo a large gut and rebuild in 2016 that took 7 months to complete, this is a flip and one more property to add to the 50 properties mentioned in 2012.”
https://themash.ca/realestategossip/2017/6/real-estate-doomsdayer-garth-turner-lists-caledon-property