Stephanie Ben-Ishai

Bankruptcy for the Poor

For two reasons, the conventional wisdom is that the poor are not heavy users of the insolvency system. First, creditors are reluctant to extend credit to the poor because the risks of non-payment are high. Not having been able to borrow, the poor are not over-indebted and are therefore not in need of bankruptcy protection. Second, some poor debtors - lone parents on social assistance for example - are judgment-proof meaning that judgments for money recoveries obtained by their creditors are of no effect because these debtors do not have sufficient non-exempt property or income to satisfy the judgment. Developments in two areas may challenge the conventional view. Undoubtedly, credit is now widely available across the spectrum of income groups. Even a short-term, low-wage job can bring a credit card to the doorstep of the poor and the slogan no credit, no problem testifies to the availability of retail credit. In addition, we now know that poverty is often a temporary state for many Canadians, with many moving in and out of low-income. Accordingly, the judgment-proof state is not a permanent condition, but a temporary status for many. While this may be welcome news in some respects, it means that debts can be accumulated during periods of relative economic well-being only to go unpaid when a job ends or when hard times return. These developments suggest the possibility that some of those who are poor at any point in time are in fact in need of bankruptcy protection. They have debts that they are unable to pay and little likelihood of being able to repay in the near future. We begin the paper by presenting evidence from the 1999 Survey of Financial Security on indebtedness among families in the lower income deciles. We then turn to the main question: should the Canadian bankruptcy process be more readily available to poor debtors. We draw on two sources to shed light on this question: a) a comparative analysis (considering England and Wales, the United States, Australia and New Zealand) and b) a series of semi-structured interviews with Canadian bankruptcy trustees and other insolvency professionals.