The Globe and Mail by Stephanie Ben-Ishai 19 December 2011
Lululemon share prices fell recently after the do-good/feel-good yoga-wear chain printed bags associating the company with the “free market at all costs” philosophy of Ayn Rand. Shareholders had a sense that middle-class consumers might be willing to pay $90-plus for a pair of yoga pants but not if it meant being associated with the controversial author’s individualistic ideology.
At the same time, the Occupy movement is getting ready to Occupy Christmas. Not coincidentally, forgiveness of consumer debt is one of the protesters’ most consistent demands. The issue is more relevant in Canada than ever: This year, our debt-to-income ratio was higher than the Americans’ for the first time in more than a decade.
But even if Canadians were inclined to give in to the Occupiers’ demands for erasing debt, predictability and certainty in enforcing valid contracts – hallmarks of our approach to a modified free-market system – would prevent us from doing so. What we need, instead, are low-cost options for dealing with over-indebtedness.
Even those who reject the ideology of Ayn Rand might argue that people who are over-indebted are morally obligated to pay the money they owe, that it’s fraudulent to do otherwise.
But the reality is that buying too many pairs of yoga pants at Lululemon is not what puts most Canadians into financial distress. Instead, research shows that the main causes of insolvency are a combination of the kind of life events that could happen to anyone: job loss, bad health and relationship breakdown. Over-indebtedness is commonly associated with ill health, which causes sufferers to withdraw from the productive economy. Increasingly, such life events among Gen Xers are affecting their boomer parents. In fact, the fastest-growing group of people going bankrupt in Canada are over 50 and, in most cases, have reached this position by helping their children.
A look at the Canadian Bankruptcy and Insolvency Act suggests that Canadians believe in the concept of a financial fresh start. The simplest explanation of how this comes about is that most of the assets belonging to the person declaring bankruptcy are sold and distributed to creditors. In return, most of the remaining debts are no longer owed. This process usually lasts nine months and is very different than the Occupiers’ call to simply erase debt.
But what Canadians don’t realize is how expensive it is: The process costs an average of $1,600. In addition, student debt – the most significant debt for many Canadians, and a focus of the Occupiers – has significant limits on how it can be dealt with in bankruptcy. Are there other legal and affordable options for dealing with over-indebtedness?
The most visible alternative to bankruptcy can be seen in the signs on the back of city buses advertising non-profit credit-counselling services with claims such as “less debt, better sex.” But such services aren’t free, either. In fact, clients are turned away if they don’t make a regular income sufficient to support a monthly payment plan, and both the client and the creditor must pay the agency involved. Furthermore, credit counselling doesn’t offer a fresh start, as the debts must still be paid, and the nature of the counselling provided is unclear.
Canada is far behind countries such as Australia, New Zealand and the United Kingdom in not offering a neutral, low- or no-cost debt-advice service providing options for dealing with over-indebtedness. Such government-funded programs existed in the past, but, over the past two decades, they’ve been eliminated. In cancelling these services, Canadian regulators have referred people to other options – such as bankruptcy and credit counselling – that simply don’t fill the void.
Rather than continuing to focus all efforts and funding on financial literacy, the timing is ripe for the Canadian government to develop a low- or no-cost neutral debt-advice service.
Stephanie Ben-Ishai, who specializes in bankruptcy and insolvency law, is a professor at York University’s Osgoode Hall Law School.