Scenes from a recovery

Fewer Canadians are going broke.

A year-long rush to file for personal bankruptcies is beginning to ease, fresh data and anecdotal evidence indicate, a strong sign for an economy so reliant on consumer demand.

Consumer bankruptcies hit an 18-year high this year as the recession eroded finances, unemployment mounted and companies forced many workers to cut back their hours.

But yesterday, the Office of the Superintendent of Bankruptcy Canada said bankruptcies among consumers fell 28.4 per cent in October from September. Economists cautioned the numbers are volatile, and it's just one month's showing. Part of the shift in October also stemmed from changes to federal bankruptcy laws that made it more costly to file for bankruptcy, causing a rush of filings by mid-September.

Still, anecdotal evidence and a three-month reading paint a brighter picture. And total bankruptcies in October, both consumers and businesses, marked the biggest decline on record, at 27.7 per cent.

"In the last couple of months, I have seen improvements," said Andy Fisher, Toronto-based trustee at A. Farber & Partners, who estimates consumer bankruptcies at his practice fell 7 per cent in November from October.

Improving finances and consumer confidence are key to Canada's recovery, particularly given that export markets will take longer to rebound.

Mr. Fisher believes consumer bankruptcies may have peaked "for now." Once interest rates and mortgage costs start rising next year, though, "I could see another spike because of the debt load people are carrying."

Just last week, the Bank of Canada warned consumers against borrowing at historically low interest rates without being able to juggle higher costs when rates inevitably rise.

A three-month moving average shows clear improvements this fall compared with the spring, said Benjamin Tal, senior economist at Canadian Imperial Bank of Commerce, who frequently writes on debt and bankruptcies. Mr. Tal sees bankruptcies stabilizing – albeit at high levels – in the coming months.

"This is the beginning of the end, but we'll be at this 'end' for a while. I don't see them going down" until the end of next year, he said.

Personal bankruptcies in Canada, as a share of the population aged 20 and up, surged to the highest level since 1991 this year, according to government data cited in a Bank of Canada report last week.

It takes about six or seven months of falling unemployment to trigger a sustainable drop in bankruptcies, Mr. Tal said.

Jobless levels are expected to stay high for months to come, but some economists have quietly scaled back their projections for a 10-per-cent jobless rate next year. Now, many believe it will peak at just below 9 per cent, not far from its current level of 8.5 per cent.

Not everyone is convinced consumer filings are on the mend.

"I'm still very busy, a lot busier this year than last year," said Doug Hoyes, a Kitchener, Ont.-based bankruptcy trustee with Hoyes Michalos & Associates Inc. who has worked in the field for more than two decades. "Debt levels are still huge. It's not like everyone's suddenly paid off their credit cards."

Monthly insolvency numbers are tallied by calculating the number of bankruptcies and the number of proposals, or offers to creditors to settle debts under new terms. The rising number of proposals suggest financial challenges haven't disappeared overnight. Consumer proposals jumped 15.2 per cent in October from September, and are 44.9 per cent higher than last October.

Mr. Tal noted that consumer bankruptcies might be much farther from peaking had this not been the first Canadian recession in which business bankruptcies didn't climb.

A "pre-emptive strike" by businesses of cutting jobs between last October and March, a period in which employment fell faster than in the last two recessions, allowed companies to stay afloat and, in turn, makes it easier for them to hire quickly as demand picks up.

"The lack of an increase in business bankruptcies is a good sign that maybe helps or at least gives us a good chance to see a situation which is not a jobless recovery," he said.

(prepared by Tavia Grant and Jeremy Torobin/Globe & Mail)