Personal bankruptcies are on the rise
By Michelle Warren • Bankrate.com

Despite news of economic recovery and job creation, fallout from the recession continues to take its toll on Canadians with the number of bankruptcies up dramatically compared to this time last year.

The latest figures from the Office of the Superintendent of Bankruptcy Canada reveal total consumer bankruptcies and proposals at 143,541 so far this year, compared to 106,219 for the same period in 2008; that's a 35 percent jump. The August figures, which were released last week, show 9,539 bankruptcies for the month, compared to 6,977 for August 2008.

It's a sign of the times as well as our growing reliance on debt to support daily life, says Laurie Campbell, executive director of Credit Canada. As a result, people felt the fallout of the latest economic crisis almost immediately: the Canadian economy and job market were hit fast and hard last November, and personal bankruptcies jumped 13 percent in December compared to the same period in 2007.

"The debt loads are explosive," says Campbell, adding it's easy for people to fall behind on payments when they're in so deep.

Most people are just a paycheque or two away from being unable to meet their financial obligations, says Doug Hoyes, a bankruptcy trustee and co-founder of Hoyes, Michalos & Associates, in Cambridge, Ont.,  who sees the ramifications first hand. "Bankruptcies are up by a considerable margin. Our call volume is way in excess of this time last year."

He also attributes this rise to the growing number of people unemployed and underemployed, as well as an overall fall in house prices. Many people who purchased homes with zero to little down at the height of the market have no equity and can't sell their houses because they're worth less than they paid for them. "In the past, people used their houses as an ATM machine or to consolidate debt, but that's not an option," says Hoyes. "The average person we meet with has been struggling probably for about six months. People are at the end of their rope."

Canadians living beyond their means
At $1.3 trillion, Canadian household debt is at an all-time high with lines of credit and credit cards accounting for the largest portion of debt, according to a study by the Certified General Accountants Association of Canada. The report showed that consumption habits are fuelling the debt crisis as people reach for their credit cards to meet day-to-day expenses; 85 percent of Canadians have outstanding debt on a credit card.

The latest employment figures from Statistics Canada show some modest gains, however, with full-time employment falling by 395,000 since the employment peak in October 2008, it's not surprising more and more people are considering bankruptcy as a means to an end.

However, Campbell cautions that bankruptcy should be a last resort. "People have to recognize this is not something you do unless you've explored everything else. Bankruptcy is really, truly a financial death."

Who can file for bankruptcy?
At its core, bankruptcy is a legal process designed to enable an unfortunate debtor relief from overwhelming debt, while ensuring creditors are treated fairly. To declare debt in Canada, you have to live here and be insolvent, which means you owe at least $1,000 that you're unable to pay.

"A lot of people are insolvent, but they don't go bankrupt," says Hoyes, adding there are several options to explore first. "Be proactive -- debts are not going to go away on their own."

Early steps include negotiating with creditors, credit counselling or a debt consolidation loan. Another option is a consumer proposal, which is filed under the Bankruptcy and Insolvency Act as part of an official effort to reduce the amount of your debt or extend the amount of time available to pay off your debt, or a combination of the two. "It's a great alternative for most people to help avoid bankruptcy," says Hoyes.