Andy Fisher hardly has to explain what a consumer proposal is any more.
These days, most people who see the Toronto-based bankruptcy trustee are not interested in talking about bankruptcy, which might be a sign of optimism in the economy, Mr. Fisher said. Most people want to talk to him instead about a consumer proposal – an option that is overtaking personal bankruptcy in Canadian insolvency cases.
Under a consumer proposal, a person negotiates, with a bankruptcy trustee, to repay creditors only a portion of his debt over a specific period of time, or to extend the time allowed to pay off the debt. The consumer can retain all of his assets, and actions by unsecured creditors are stopped without declaring bankruptcy. In the case of bankruptcy, any garnishments against the person's salary will stop, but any assets that are not exempt by provincial and federal laws are sold by the trustee.
"The vast majority of people that I see are coming to talk about a consumer proposal and not about a bankruptcy," said Mr. Fisher, a partner at A. Farber & Partners Inc. "When we meet with people we review all options for them, but in many cases a proposal is in their best interests, it works best for them. On a relative basis, a consumer proposal is much more appealing to a bankruptcy compared to the way it was four, five years ago."
Bankruptcy figures are down since the recession, but an increase in the number of Canadians negotiating their way out of debt is changing the composition of insolvency figures, according to a CIBC report released Monday.
Personal bankruptcies have returned to pre-recession levels, to four insolvencies per 1,000 adults, from an all-time high reached during the recession of six per 1,000, the report said.
In the 12-month period ending May 31, 2013, 117,748 insolvencies were filed by consumers; 69,998 resulted in bankruptcies and 47,750 in proposals, according to data from the Office of the Superintendent of Bankruptcy Canada. While the number of personal bankruptcies fell more than 7 per cent in the same period, the number of proposals has continued to rise.
The number of Canadians striking consumer proposals has grown to 40 per cent of total insolvency cases, from about 15 per cent in 2006 – an increase that underscores a major shift in how consumers are avoiding the full bankruptcy route.
"One should not just look at [the figures] and say 'Okay, bankruptcies are going down' but look at the other component of insolvencies which is becoming more and more important now," said Benjamin Tal, deputy chief economist at CIBC World Markets Inc. and author of the report.
"Before, it was not really an issue because proposals were very small, but currently, proposals make up 40 per cent – and in Ontario 50 per cent – of total insolvencies, so they're big enough to make a difference."
In 2006, only 15 per cent of insolvent Canadians opted for consumer proposals. When regulations changed in 2008 to allow proposals to cover up to $250,000 in non-mortgage debt, the rate rose rapidly to the current 40-per-cent level. Mr. Fisher believes consumer optimism is contributing to an increase in the number of proposals. "People are a lot more optimistic about their long-term future, so they feel more comfortable being able to make the commitment that's needed to do a consumer proposal versus a bankruptcy," he explained.