Source: The Canadian Press

The number of insolvencies crept up in August compared to the previous month, but remained well below levels reported in the year earlier, suggesting that despite a slowing economy, debtors are faring slightly better than they did in the depths of the recession.

Total consumer and business insolvencies, which include both bankruptcies and proposals to creditors, were up 1.9% from July, but down 12.4% from August 2009, according to statistics released Tuesday by the Office of the Superintendent of Bankruptcy.

Although the number of filings was dramatically lower than a year ago, when consumers rushed to file before stricter rules took effect, the federal agency said it was rare for insolvencies to rise between July and August.

“Over the past 10 years, there were only three years when the total number of insolvencies filed in the month of August was higher than the total number filed in July,” the bankruptcy office said in its monthly statistical report.

While the year-over-year decrease is encouraging, the rising month-over-month figures are an important reminder that Canadians could very well be in the “eye of the storm,” and insolvencies could spike higher, said bankruptcy trustee Douglas Hoyes of Hoyes and Michalos and Associates.

“We’re certainly not out of the woods,” he said.

“We are farther along in the recovery than we were a year ago, so that’s good news… (But) it could very well be that this is a temporary blip up and we could see further weakness ahead.”

The year-over-year figures are considered to be a somewhat imprecise measurement because the number of filings in August 2009 was affected by a large number of indebted consumers who rushed to beat legislation introduced last fall that made filing for bankruptcy more difficult, Hoyes said.

A 12-month comparison, which pegged the decrease in insolvencies at a more modest 2.5%, may be more indicative, he added.

“It is a small, incremental, baby step type of recovery, what’s saving people right now is that interest rates are still very low,” said Hoyes.

Shortly after the figures were released, Finance Minister Jim Flaherty announced Canada’s economic growth rate likely slowed to 1.8% in the third quarter.

The economic recovery has slowed faster than expected since the spring, when growth fell to 2% from growth rates of 4.9 and 5.8% in the fourth quarter of 2009 and first of 2010.

The federal bankruptcy office paid specific attention to the growing number of seniors entering bankruptcy, which has more than quadrupled in the past two decades.

From 1989 to 2009, the proportion of insolvent consumers among those 55 years of age or older has risen from 4.6% to 20.6%, the office said.

Hoyes said the troubling demographic shift could be due to a growing number workers in their 40s and 50s carrying mortgages and other debts who suddenly find themselves unemployed.

“It used to be that those were your prime earning years, you were topping off your RRSP and saving as much as you could … but now (they think) ‘I don’t care about retirement, I’m cashing in my RRSP so I can afford to live’.”

Bankruptcy trustee firm A. Farber & Partners said the statistics on seniors reflect that their finances are increasingly vulnerable and that pensions and old age supplements aren’t enough to sustain them.

“They are turning to credit cards and lines of credit just to keep themselves above the water line, eventually forced to file for protection when these sources of cash run out,” the firm wrote in a release.

Hoyes warned that September could show another monthly rise, adding that a very weak U.S. economy, as well as a rise in domestic interest rates could threaten to derail Canada’s recovery and send bankruptcy rates higher.

His firm received more calls from indebted consumers in August than it did in July, and the number of calls has continued to rise during September and into October, he explained.

Both the monthly and yearly statistics reflected a widespread trend of falling bankruptcies and rising proposals.

The number of Canadians who declared bankruptcy in August fell 25% from last year, when many consumers rushed to beat new regulations introduced September 2009 that make bankruptcy filling more expensive and time consuming.

Meanwhile, the alternative consumer proposal, which offer creditor protection while a portion of debt is repaid, has risen 37%.

The number of bankruptcies was down 0.4% and proposals up 7.2% in August from July.

Consumer proposals were introduced in the 1990s for people who can’t afford to pay off their debts in full, but have income that is consistent enough that they can continue to make monthly payments.

They’re being used more and more in the aftermath of the global financial crisis, when consumer bankruptcies skyrocketed as much as 56%, year-over-year.

There were a total of 10,951 insolvency filings in August, including 370 by businesses and the rest by individuals. The 10,581 consumer insolvencies in August included 7,115 bankruptcies. The remaining 3,466 were proposals to creditors.

Consumer insolvencies dropped 12.1% this past August compared to August 2009, while business insolvencies were down a whopping 20.6%.