Growing Old Gracefully, An Investigation into the Growing Number of Bankrupt Canadians over age 55 — Parts 1 to 4

I. Introduction

For the past five years, the number of Canadians over age 55 who have declared bankruptcy has grown steadily. This is a troubling phenomenon, since presumably economic certainty and freedom would only be more likely in the later stages of life as habits of prudence are inculcated. Our inquiry seeks to explain the phenomenon, more specifically, to discern the causes for the rise of bankruptcy for the group of Canadians who have filed and are over age 55, both regionally and nationally. Our study has made a preliminary analysis of data collected by the Office of the Superintendent of Bankruptcy (OSB) for bankrupts filing from 2003-2005, augmented by a qualitative survey of consumer bankrupts that declared bankruptcy during this period. This project examined the growth in bankruptcies for those over age 55 from a legal, economic, social and philosophical perspective, allowing for a multidisciplinary investigation with research collaborators from the Faculty of Law, Department of Economics and Department of Philosophy at the University of British Columbia to assess the potential and limitations of the fresh start paradigm for older consumer debtors.

If one public policy objective is truly to allow our citizens to "grow old gracefully" by having social and economic security, we need to identify the factors that serve as barriers to realization of that goal and make policy recommendations that would ensure our social and economic instruments are responsive to the underlying causes of consumer bankruptcy.

II. Research Objectives

The principal objective of the study was to explore issues unique to consumer bankrupts over age 55 and, in particular, to discern the causes of bankruptcy nationally and regionally. It explored whether there were any gender issues associated with bankruptcy at an older age. Another objective was a qualitative survey of consumer bankrupts over age 55, to ascertain information about their experience with the bankruptcy system through in-person or telephone interviews.

A further objective, which will be the subject of a scholarly paper later this year, was an exploration of the adequacy of the current system to address over-indebtedness of aging citizens, undertaking a comparative analysis with similar trends in the United States. The goal is to provide meaningful analysis for insolvency administrators and legislators, to provide a better basis on which to consider revision to consumer bankruptcy legislation in Parliament's anticipated reform of the Bankruptcy and Insolvency Act (BIA) in 2006.

There were a number of research questions at the outset of the study. The data available allowed the investigators to answer some of those questions. Others were not possible to research given the current state of data collection in Canada and are discussed in our recommendations for further research and data collection at the end of this report. This report addresses the following research questions: 

1. How is consumer bankruptcy being used as an economic adjustment tool for an increasingly aging Canadian population and is it the appropriate mechanism for relief of over-indebtedness for those that are approaching the limits of their income earning years?
2. What are the principal causes of bankruptcy for consumer debtors over age 55, explored in 5-year cohorts from age 55 to 74 and then for the group over age 75.
3. A sub-question of this inquiry is whether over-indebtedness is due to inadequate pension savings or the lack of social safety nets and, if so, are those no longer active in the workforce required to meet their basic needs through overuse of credit purchases or other credit facilities?
4. The OSB reports that there are considerable regional differences in the growth in the number of consumer bankruptcies. Are the numbers for those over age 55 increasing at the same rate as the general population? If not, what factors are contributing to a higher or lower rate of growth?

III. Context for the Study

There has been a large increase in the number of consumer debtors that experience financial distress. The number of consumer bankruptcies in Canada has grown in the past 30 years from 6,271 bankruptcies in 1973 to 84,638 in 2005¹. The total number of insolvencies, including both proposals and bankruptcies was 111,807 in 2005². The average age of debtors who filed bankruptcy proceedings in 2004 was 42.5 years old, higher than the average age of the Canadian population, which was 38.3 years in 2004³.

In 1980, the insolvency rate was 1.1 per thousand Canadians; by 2004, that rate had quadrupled to 4.0 per thousand Canadians⁴. Comparing the Canadian rate of bankruptcy to other countries in 2004, the United Kingdom rate was 1.1 per thousand population; Australia was 1.8 per thousand; and the United States is 7.0 per thousand population⁵. Hence while Canada fares better than its neighbour to the south, its rates are much higher than the UK and Australia.

Scholars have attributed the rise in consumer indebtedness to the rapid growth in credit card availability and the ease of receiving credit facilities from manufacturers of consumer goods⁶. The downsizing of government and the financial failure of numerous large corporations, as well as the exportation of jobs to transition nations has also, arguably, had an impact on the financial security of Canadians. Many of our citizens that are approaching their retirement years were employed in the resource sector or the automotive sector, both of which have experienced fluctuations in economic activity and frequently, the shedding of long-term employment. Unlike the United States, in which there is considerable empirical analysis of consumer bankruptcy, in Canada, there has not yet been sufficient investigation into the underlying causes of consumer bankruptcy. Analogously, there have been few efforts to reform public policy or information gathering that might address this recent trend.

There has also been a dramatic rise in the number of summary administration bankruptcies, where the net value of the estate is below $10,000. In 2002, 96.4% of bankruptcies administered by the OSB were summary administration bankruptcies. Roughly 85% of consumer bankrupts do not have surplus income over Statistics Canada Low Income Cut-offs that would be available to meet payments to creditors over a prescribed period. A working hypothesis for this study was that this percentage would be considerably higher for those over age 65. There has been a lack of empirical data on the causes underlying this level of financial distress.

Moreover, the exemptions of property in consumer bankruptcy vary considerably across Canada, because the provinces currently regulate them. Exemptions are designed to meet basic needs and to protect a limited number of apparel and furnishings, medical aids, limited equity in vehicles and tools of the trade from being brought into the estate and liquidated to satisfy creditors' claims. In some provinces, there is no exemption for equity ownership in housing, while in other provinces there are limited amounts, with little acknowledgement in the exemptions of the rising cost of living. Given that those over age 65 are less likely to require exemptions for tools of the trade but may have equity ownership in their homes as economic security, it may be that the current exemption scheme is inadequate to deal with the particular needs of aging consumers. Moreover, the issues faced by those aged 55-65 likely are quite different than those over age 65 or 75. Hence the study examined consumer bankrupts in the following age categories: age 55-59, 60-64; 65-69; 70-74 and age 75 and older, in order to ascertain a more reliable picture of what is occurring within these age groups.

The Senate Committee observed that the bankruptcy system is increasingly compromised for low-asset low-income debtors, but acknowledged that there needs to be more empirical evidence as to the precise effects of the system on this class of debtors. This study has commenced this investigation in respect of consumer debtors over age 55, but much more work is required in order to have a sufficient picture.

Another research objective was to make policy recommendations to the OSB as to ways in which the current data collection could be improved as the OSB moves toward greater electronic filing and statistics administration, which we propose throughout this report.

IV. Methodological approach

Given the limited amount of research funds available, the study concentrated on statistics of consumer debtors over age 55 for the past two years, with reference back for comparative periods where the information is available. The OSB currently has an electronic database of roughly 60,000 consumer bankruptcy files, and this project was aimed at retrieving and analyzing the information related to those over age 55. The OSB has data on 7,997 consumer bankrupts over age 55 who filed in 2003-2005.

Stage 1: Analysis of 1,000 Representative Files

The first part of the study involved design of research fields for retrieval of electronic records, working with staff and economists at the OSB. The study then analyzed a sample of 1,000 cases of bankrupts to determine the causes of bankruptcy. One problem that currently exists with the electronic data is that there are not separately captured fields for cause of bankruptcy. Hence, the data on causes had to be manually pulled from the files, assessed in terms of the primary cause (self-declared) of bankruptcy and then entered into an Excel database. This was a very labour intensive task. A methodology for analyzing the data was developed, coding variables within cases on a consistent basis so that comparisons could be generated across age cohort and region.

One recommendation is that the OSB seriously consider revising its forms to begin to capture cause of bankruptcy data in different fields. The data collection tool should provide a way for bankrupts to indicate primary and secondary causes, where there are multiple causes. This would allow for empirical research on causes of bankruptcy across the entire population, including all bankrupts over age 55.

One limitation to analyzing this data was that there were instances in which bankrupts listed more than one cause of bankruptcy, for example, job loss combined with over-extension of credit. For purposes of this study, we took the declared primary cause, but it is important to note that there are frequently synergistic contributions to financial distress that are not captured when reporting global statistics.

Stage 2: Full Database

The project analyzed the full data set of 7,797 bankruptcy files with filing dates from 2003-2005 by retrieving data and undertaking analysis of the data by age cohort, region, occupation, type and quantum of debt, asset level, income level and gender⁷. This allowed for global analysis of the data for which there are discreet fields, as discussed in parts V-VII of this report. While the data set was relatively complete, there were files in which fields had not been completed with information. Given that some data collection is relatively recent by the OSB, the completeness of the data is likely to be enhanced in the future.

One recommendation would be that the OSB set up its e-filing system so that the trustee cannot file the forms if particular fields are not completed, allowing the OSB to collect the most critically important data.

Stage 3: Qualitative Study

The objective of this part of the study was to design and conduct a qualitative survey by interviewing recent consumer bankrupts over age 55, aimed at enhancing the raw data. The qualitative study was undertaken in conformity with privacy legislation and university ethics approval. Given the age cohort, it was expected that most of the information would be gathered in telephone interviews; however an offer was made in the greater Vancouver area to conduct the interviews in person if the individual wished.

There were significant challenges for conducting the qualitative part of the study and the study encountered some difficulties in gathering the empirical data. The objective was originally 100 participants. The questions were formulated with the assistance of five trustees, who discussed their recent experiences with consumer bankrupts over age 55. There were 15 questions in the survey, set out below.

The ethics approval from the University of British Columbia took seven months, requiring three amendments to the application because of concern by the Ethics Board about the vulnerable nature of the survey group. When approval was granted, the conditions were very specific and limited. The research team was prohibited from following up on the initial letter and consent form with a telephone call, unless the consent had been mailed in. Since there is a much greater likelihood of participation when letters are combined with personal contact, this severely limited the number of possible participants in the survey. The Ethics Board declined to approve an accompanying letter from the OSB on the basis that the bankrupt person may feel pressure to cooperate given the involvement of the OSB. Our view, to the contrary, is that such a letter would have assisted in reassuring older bankrupts of the value and legitimacy of the survey. The Ethics Board also declined to allow trustees, who work with bankrupts in part to alleviate the financial distress, to approach possible participants⁸.

The Ethics Board also required that the letter outlining the purpose and goals of the study had to specify that the survey would cause the participant stress. We conjecture that this may well have been a factor in the number of willing participants. Let us also note here that the interviewer (a trained graduate student) was not allowed to deviate from the 15 approved questions, even where a follow up question might have been warranted. We respect the importance of uniformity in the survey, but also believe that the process itself might have unearthed additional factors had more questions been admissible.

The Board also imposed a very high standard of confidentiality and protection of privacy requirements, which we deemed appropriate given the vulnerability of this population.

Once ethics approval was received, 400 letters were mailed to participants based on a random list by region generated by the OSB. The letters were accompanied by the questions that would be asked; a covering letter setting out the project, including names and contact numbers of the person surveying; consent forms; and self-addressed stamped envelopes. The study required that the covering letter include ethics department contact information for complaints about the survey.

Of the 400 letters sent, 81 letters returned as moved, a figure very high for an older population. This may reflect continuing financial uncertainty, although there is no clear evidence of this. Eight letters were returned by a family member, advising that the bankrupt had passed away. Ultimately, only 16 bankrupts agreed to be surveyed. As a result, the sample size is not significant enough to draw any firm conclusions. The small survey did, however, yield observations congruent with the findings of the 1,000 sample provided by the OSB, both in terms of the primary causes of bankruptcy and the causes of the recent increase in bankruptcies.

While not statistically significant, the qualitative survey did provide a texture to the electronically filed data, and so is included on that basis. Further consideration should be given as to whether additional qualitative study should be conducted, seeking participation of a broader number of people in order to capture a sample that is statistically significant.

Survey questions: 

1. What was the main reason for your bankruptcy?
2. Did you use your credit card to pay your utilities bills?
3. Did you use your credit card to pay for groceries?
4. Did you use your credit card to help your family?
5. Did you co-sign a loan for a family member?
6. If yes, you co-signed a loan for a family member, was it for a business? A car? A mortgage?
7. Were there any family related issues that caused the financial distress? (For example, child's loss of income, death of spouse?)
8. Were there costs for health care that led you to declare bankruptcy?
9. Did any social activities make your financial situation worse?
10. Was it difficult to tell family or friends about the bankruptcy?
11. If you had someone to talk to about your finances before the bankruptcy, would it have helped?
12. Did you have access to your pension savings before declaring bankruptcy?
13. If the bankruptcy was caused in part by a job loss, were you able to find employment again?
14. How long has it been since your bankruptcy and has your economic situation improved?
15. Is there anything else that you think would help us with our research in understanding why more people over age 55 are declaring bankruptcy?

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¹ Office of the Superintendent of Bankruptcy, http://osb-bsf.gc.ca, accessed March 2006.

² This was a 0.3% increase from 2004 to 2005; the OSB suggests that the slower rate of increase in the past year was attributable to low interest rates and better job creation performance; ibid.

³ Office of the Superintendent of Bankruptcy, An Overview of Canadian Insolvency Statistics, (Ottawa: Industry Canada, 2006) at 3.

⁴ Ibid. at 21.

⁵ Ibid.

⁶ Karen Gross, Failure and Forgiveness; Rebalancing the Bankruptcy System, (Yale University Press, 1997); Teresa Sullivan, Deborah Thorne and Elizabeth Warren, "Young, Old, and In-Between: Who Files for Bankruptcy?" (2001) 9 Norton Bank. Law Advisor; Teresa Sullivan, Elizabeth Warren and Jay Lawrence Westbrook, "The Fragile Middle Class: Americans in Debt" (2000); Daniel Skoler, "The Elderly and Bankruptcy Relief: Problems, Protections, and Realities" (1989) 6 Bank. Dev. J. 121.

⁷ The data was generated on February 27, 2006 by the OSB.

⁸ Trustees have multiple roles in the Canadian bankruptcy system, including realization of assets for the benefit of creditors; assisting the debtor in filing bankruptcy; serving as a proposal trustee; and counselling bankrupts.