Bankruptcies are considered the fastest way to recover from excessive debt, but a new study shows that the relief is short-lived and that Canadians that file bankruptcy end up with almost as much debt as they started with five years later.
Credit Counselling Canada published a study earlier this year that compared the long-term financial outcomes of consumers who used debt management programs, bankruptcy or a consumer proposal to gain relief from debt. It was designed to help consumers, lenders, credit counsellors, insolvency trustees and policymakers better understand the outcomes of different options.
Among the research's most notable findings is that consumers who complete a bankruptcy filing “are provided with some immediate relief, but it is not clear that they have genuinely rehabilitated and can manage their finances.”
The study evaluated the credit data of 336 clients who have completed a debt management program, and then compared those results to similar Canadians who completed either a bankruptcy, consumer proposal or chose to do nothing (a control group). It evaluated the financial situation one year before the program or filing, as well as five years after, so the study dates back to the choices made by consumers in 2013-14 and their subsequent results.
Five years after the filing, the debt relief groups all have lower credit scores than the control group, but otherwise fare well, with less revolving and instalment debt, less (non-mortgage) total debt, lower monthly debt payments and fewer accounts that have balances or are delinquent.
Comparisons among the groups show that debt management clients reduce their debt from an average of $17,250 in the year before starting the program to $4,900 five years later, Consumer proposal filers similarly reduce their debt from $17,125 to $5,900 over the same period. Bankruptcy filers, however, have a revolving debt of $17,675 one year before filing, and six years later, have $14,740.
Credit scores for bankruptcy filers rebound faster than for those who filed a consumer proposal, but they still have lower overall scores. Consumer proposal filers have the largest decline in credit scores.
Although the three programs offer debt relief, there are differences in how they work. Bankruptcy is the most comprehensive relief. Most of the debt owed is eliminated after the liquidation of the consumers’s unprotected assets. In a consumer proposal, consumers make an offer to pay a percentage of what is owed to creditors, or to extend repayment, or both. Debt management programs are administered by not-for-profit credit counselling agencies, and result in a 100% pay off of debt over an extended period, often with reduced interest.