Download - INSOLVENCY AND DEBT MANAGEMENT ROUNDTABLE Nov 26 2010 Iain Ramsay.

INSOLVENCY AND DEBT MANAGEMENT ROUNDTABLE

Nov 26 2010

Iain Ramsay

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Consumer Bankruptcy and Proposal Filing Rate “Anglo” origins(per 1,000 inhabitants aged 18 years and older) Source Office of Superintendent of Bankruptcy Canada

Canada: Consumer Bankruptcies and Consumer ProposalsUSA: Chapter 7, 11 and 13Australia: Personal Bankruptcies (parts IV and XI), Personal Insolvency Agreements (Part X) and Debt Agreements (Part IX)UK: Bankruptcies and Individual Voluntary Arrangements (England, Wales, Northern Ireland), Sequestrations and Protected Trust Deeds (Scotland)


Per 1000 Capita Personal Insolvency Filings 2002,2008 [source Gerhardt, 2009: OSB Canada]

2002 2008

England and Wales 0.6 2.0

Germany 0.2 1.2

France 0.4 1.1

USA 5.3 3.5

Canada 3.8 4.4

Page 3

Household Indebtedness to gross disposable

income 1995-2008 (OECD Factbook, 2010)

4

Consumer Credit outstanding per capita December 2008

UK 4208

France 2,140

Germany 2108


Issues

• “whether the current range of collective debt solutions is fit for purpose and whether a debtor is likely to feel enable to choose the right solution” (DBIS)

• Opportunity to think broadly about system as a whole, its objectives, costs and benefits of different approaches, relationship to credit granting system.

• Identify need for further evidence, key questions. Draw on comparative knowledge.

Issues

• What does rehabilitation mean?

• Do existing procedures achieve this?

• Costs and benefits of different procedures

• Balance of public/ private involvement



Canada

• Two primary alternatives

• Consumer bankruptcy (nearly all debtors’ petitions)

• Consumer proposal –up to $250,000 excluding mortgage (currently about 25% of total)

Insolvency 2007 2008 2009

Bankruptcy 79,796 90,610 116,381

Proposal 19,486 25,179 35,331


Canada Insolvency per 1000 pop.

Rate 2006 2007 2008 2009

Insolvency 3.8 3.9 4.4 5.8

Bankruptcy 3.1 3.1 3.1 4.5

Proposal 0.7 0.8 1.0 1.4


Consumer Bankruptcy

• Consumer bankruptcy: discharge after nine months

• May have to make payments if “surplus income”: based on standardised national guidelines related to LICOS

• Pay surplus income for 21 months: then discharged (20%).

• Creditors or OSB can object to discharge on specified grounds (relatively small numbers-- under 10%): possibility of conditional discharge

• Summary administration procedure…can file electronically

• Requirement of two counselling sessions


Consumer Proposal

• Maximum five years but norm was 3 years.

• Need acceptance of 50% in value to bind other unsecured creditors

• Will be able to keep home provided keep up mortgage payments. Secured creditors not part of plan

• Will not obtain better credit rating (on file for 3 years after completion)


Financing

• Approx $1800 fees in summary admin. Can pay over time and make agreement to pay beyond discharge for 12 months.

• Bankruptcy Assistance programme

• Consumer Proposals: $750 filing + $750 on approval + 20% of moneys distributed to creditors.


Regulation

• Trustees (generally accountants) licensed by OSB…subject to monitoring, all documents lodged with OSB.

• Private provision with public regulation

• Move to extend licensing to permit consumer credit counsellors to administer consumer proposals

• Primarily an administrative system of private actors regulated by OSB and with courts as backstop


Gatekeeping/Monitoring

• Trustee must do “assessment” interview: outlining options

• Creditors, trustees can object to discharge including on grounds that could have done a proposal

• OSB monitoring


US

• Chapter 7 & 13

• Chapter 7 “the fresh start” …’ it gives to the honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of bankruptcy a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt’ Local Loan Co. v. Hunt, 292 U.S. 234 (1934)

• Relatively swift discharge: exemptions: post-bankruptcy income protected.

• Chapter 13 repayment of portion of debt no more than 5 years

• Chapter 7 traditionally about 66%; Many Chapter 13 plans not completed.


BAPCPA 2005

• “Means testing”…average income over previous 6 months compared with median state income: if above then may be converted to five year Chapter 13.

• Pre-bankruptcy counselling

• Mandatory financial education course


Effects of BAPCPA

• Increased costs of bankruptcy

• Balance of Chapter 7/13 not now substantially different. 71% Chapter 7 in 2009.

• Filings increasing: 1.4 million consumer filings in 2009.

• Some studies (Porter) suggest that possibly 25% of bankrupts are still having financial problems one year after bankruptcy + targeted by high-cost credit. How fresh a start or safety net?