Garth Whyte of the Canadian Federation for Independent Business. (Etienne Ranger, OBJ)

Bankruptcies in Ottawa rising but local market not to blame, say lawyers

When Michelle (not her real name) found herself weighted under $20,000 in credit card debt in 2007 – while only turning in a yearly salary of $5,000 to $8,000 – she says she realized digging herself out would be an impossible task.

"It was a time of sadness," she says. "It degrades you as a person, you know. You're embarrassed, and you figure out how could I get myself into this situation, right? So you tend to do a lot of reflecting, and . . . I told myself never again would I get myself in this situation."

Cutting the plastic umbilical cord to credit enabled Michelle to start over.

More Ottawa residents may have pondered doing the same last week, as worldwide markets tumbled and credit markets constricted during legislative debates over a $700-billion U.S. bank bailout. In the last quarter alone, Ottawa's personal bankruptcies were up 22 per cent quarter-over-quarter; 886 people filed between April and June as opposed to 725 at the year's beginning.

A CIBC World Markets report last August indicated personal debt in Canada is climbing faster than wealth, noting that the debt-to-asset ratio of Canadian households is now at a five-year high of 18 per cent.

"Obviously there's a little more fear in the market," says Bill Lawson, a Sprott School of Business professor at Carleton University who is in semi-retirement.

"Consumers are (a big) part of the overall economy. Expenditures will fall back a little bit, and that will hurt various businesses."

Local bankruptcy lawyers and trustees say they've received numerous recent inquiries about insolvency. But Ottawa itself has been shielded from en masse bankruptcies – so far.

Several lawyers, including Michael Carson of Surgeson Carson Associates Inc., say widespread government employment in Ottawa is a buffer against the cold winds of financial change. But a number of consumers likely will be affected, they say.

"We're seeing an increase in personal bankruptcy inquiries for the same reasons they've been all along – thoroughly poor investments as a result of overextended credit," says Mr. Carson.

"That's been a problem that's just been highlighted by what's going on in Wall Street and the States right now, and the inability of consumers to repay that debt."

"Layered across this is the trend of a shortage of labour problems (in Ottawa)," adds Garth Whyte, executive vice-president of the Canadian Federation of Independent Business.

"It's a shock absorber on the employment side for what's happening. What our members are saying is things are still OK and are not feeling the credit crunch yet. The banks in Canada are stable and strong, and haven't had to tighten down credit as much as in the United States."

Still, hard times may lie ahead. Brian Doyle, co-founder and president of Doyle Salewski Inc. – the trustee investigating the more than $20 million in transfers and unpaid debt at Zoom Airlines and Go Travel Direct – says Canadian corporations are going to face trouble finding money as capital dries up in the United States.

Local companies – particularly in high-tech – depend on those cross-border funds, he points out.

"There will be a real retraction in the money supply, and that means people are going to lose jobs. There's going to be less activity.

"It's going to be tough . . . (but) to some extent the high-tech knowledge will escape some of this. Automotive construction and real estate are the most affected."

Bankruptcies can arise because of ill health; Michelle, for example, has cerebral palsy. Understanding of how finances work, though – the idea of paying off credit cards on time, and not taking on more debt than what your income can handle – is key for people looking to stay out of trouble.

"Regarding financial literacy: Canada has been way behind both the Americans and the British," says George Brown, president of the Ottawa Community Loan Fund. His organization will hold a summit on Oct. 28 that will address debt management and payday loans.

"The Americans have financial literacy programs built into the schools, and they are mandatory in many cases. We are just beginning in Canada to talk about this, and hence, that's why we're having problems."

Even the well-to-do, however, can become bankrupt through unfortunate circumstances.

In July, federal labour minister Jean-Pierre Blackburn signed an Order in Council that allows people to discharge student loans after seven years instead of the former 10.

John Haralovich, an associate partner at KPMG, saw more clients come in during the summer to take advantage of this.

"We are seeing a little more increase in people going bankrupt due to the student loans change," he says, adding, "These are loans that are more than seven years old, but not 10 years old.

"They were waiting for that law to be passed and have now taken advantage to allow them to go bankrupt. So there was a little bit of a surge in July and August of individuals taking advantage of that three-year window that was granted."

How hard the market downturn will hit Ottawa is something Mr. Doyle says nobody will be able to predict.

"(It's) certainly the largest and most severe, I would think, in my lifetime . . . but who's right? It's so hard to tell. I've lived so long. I've seen so many people be wrong, and I'm discouraged at our inability to be able to focus.

"How (much) this is going to hurt will depend on the bailout."

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BREAKING THE BANK

PERSONAL BANKRUPTCIES IN OTTAWA

2007:

Q1 757

Q2 806

Q3 727

Q4 805

2008:

Q1 725

Q2 886

Source: Insolvency Statistics in Canada, Office of the Superintendent of Bankruptcy in Canada