RE bankruptcies start to rise

[jimtan]

Bankruptcies climb in B.C.
Drop in real-estate values is sending homeowners to the poor house

Gerry Bellett
Vancouver Sun
Sunday, October 26, 2008

As the global financial crisis begins to kick in, nearly one in six U.S. homeowners are finding themselves owing more on the mortgage than the house is worth. Here in B.C., the number of personal bankruptcies is on the rise as real-estate values drop.

VANCOUVER - Dropping real-estate values are sending more British Columbians into financial crisis and causing a spike in personal bankruptcies, according to professional debt counsellors.

Federal Industry Ministry data show that B.C. consumer bankruptcy filings for August were up more than 10 per cent over the same period last year.

August also saw a 16.3-per-cent increase in proposal filings, an alternative to bankruptcy.

And that was an improvement over July, when B.C. consumer bankruptcy filings were up 14 per cent over the same period last year and proposal filings were up 20 per cent.

"It's a big jump," said B.C. Association of Insolvency and Restructuring Professionals director Lana Gilbertson. "We don't know if it will continue upwards, but during the recessions of 1981 and 1990-91 there were rapid increases in insolvency rates.

"Our professional community is seeing more and more individuals who can't sell their property for what they thought it was worth and who can't refinance or borrow more money against their property. They're stuck," she said.

For several years, Canadians have suffered from high levels of household debt, low rates of personal savings and feelings of stress about their finances, said Gilbertson.

"But a strong real estate market in B.C. kept many afloat as homeowners were able to use a growing equity in their property to offset their consumer debt," she said.

That's coming to an end, however, as a slowdown in the real estate market is seeing home prices dropping in many regions.

Gilbertson described the plight of one Metro Vancouver couple, both working and in their late 20s and expecting their first child next year.

They own a condo worth $250,000 and had increased their mortgage by $40,000 two years ago to pay off some debt.

"Over the following two years they have borrowed again to finance a web-based home business and have generally used up credit cards and lines of credit and personal loans, so that their unsecured debt is $105,000 in excess of their mortgage," said Gilbertson.

She said there wasn't any room in their household finances to adequately service the debt and there were no other assets to draw on. As well, the couple was facing a loss of income in 2009 when the wife took maternity leave.

Instead of the couple declaring bankruptcy, Gilbertson said she was able to negotiate a debt settlement of $40,000 to be paid to creditors over the next five years.

"It got them out of a hole. They are insolvent, but they've got a repayment plan in place and it is a lot better than their being bankrupt," she said.

While homeowners are increasingly at risk, those under the age of 35 and those on fixed incomes or pensions are also feeling the pressure of consumer debt, Gilbertson said.

She said bankruptcy trustees, many of whom were Chartered Insolvency and Restructuring Professionals, can help consumers look for alternatives to bankruptcy.

"They can provide debt and credit counselling and are the only professionals who can administer formal debt repayment or settlement strategies," she said.

Fees for the insolvency service are based on a fixed tariff reviewed by the superintendent of bankruptcy.

[thinktom]

I have a tough time feeling sorry for anyone who takes out non-existant 'equity' loans on their homes at peak prices and then finds themselves in trouble when values drop. My father would roll over in his grave if he ever knew I maxed myself out on my own home. Lovely conservative ol' fart, he was.

Tom
http://www.thinktom.com

[jimtan]

Right!

Fortunately, 99% of the poeple don't get in trouble. Anyway, the rise in bankruptcies is normal for this time of the cycle. We will just have to see how the job market holds up. The good thing is that Canadian banks are interested in a deal rather than bankruptcy.

[jockey1]

Fortunately, 99% of the poeple don't get in trouble.

...and you know this how? Any stats?

...with the savings rate at all time lows in BC (in fact unlike the rest of the country BC savings rates are deeply negative just like the Americans) I think the prospects for bankruptcy are materially higher than what you seem to imagine....

[gadwin]

Fortunately, 99% of the poeple don't get in trouble.

...and you know this how? Any stats?

...with the savings rate at all time lows in BC (in fact unlike the rest of the country BC savings rates are deeply negative just like the Americans) I think the prospects for bankruptcy are materially higher than what you seem to imagine....

Agree with jockey1. We know that Alberta foreclosures are rising:

http://www.canada.com/reginaleaderpost/news/story.html?id=b2b862bb-ef9e-4caa-878f-e7fca45193d4

Many bulls in the foreclosure thread were arguing that BC laws make it harder for people to walk away from their property versus Alberta.

But what if people go bankrupt? If we have a higher number of bankruptcies than Alberta, doesn't that mean our foreclosure rate can eclipse Alberta?

[jimtan]

Ah! Office of the Superintendent of Banktruptcy Canada (an agency of Industry Canada) Prepared by: BC Stats, March 2008

Annual Consumer Bankruptcy Rates by CMA and Economic Region
British Columbia (Per 1,000 Population)
1997 1998 1999 2000 2001 2002 2003 2004 2005
2.4 2.3 2.6 2.9 2.9 2.9 2.8 2.5 2.4

The interesting thing is that the rate only rose 20% during the 2001-3 downturn. Interesting?

“Don Campbell, president of Alberta Real Estate Investment Network, said the number is relatively small, making up 0.28 per cent of the 471,913 mortgages across Alberta.

"It's not going to skyrocket as it did in the United States because our banks are substantially more conservative in their lending," he said.

Still, local lawyers who specialize in foreclosures said they have also been busier.

"We have definitely noticed a pickup in foreclosure work," said Andrew Maciag, a partner with Borden Ladner Gervais LLP.

"I wouldn't say it's dramatic, but there is a definite increase."

[jockey1]

Annual Consumer Bankruptcy Rates by CMA and Economic Region
British Columbia (Per 1,000 Population)
1997 1998 1999 2000 2001 2002 2003 2004 2005
2.4 2.3 2.6 2.9 2.9 2.9 2.8 2.5 2.4

...the last number here is 2005 - it certainly looks great in the rearview mirror but says nothing about where we are going ...

The interesting thing is that the rate only rose 20% during the 2001-3 downturn. Interesting?

...only rose 20% during 2001-03?? Well consider that during that time period a) Canada did not experience a recession and BC only had a very mild one and b) interest rates were at all-time lows and lending conditions were being really loosened up.

So what kind of increases might we see this time given that the recession will be deeper and credit is not flowing as freely? Throw in extremely expensive (overvalued) real estate this time too along with glorious amounts of mortgage debt and I think you have a recipe for way more than a 20% increases in bankruptcies.

"It's not going to skyrocket as it did in the United States because our banks are substantially more conservative in their lending," he said.

...just because we didn't have as bad a subprime lending problem as the US doesn't preclude the fact that people overpaid for housing here and a big correction is still needed. All it takes to match price declines in the US is a run-up in supply vs a sustained drop in demand. When prices start falling, people could also easily fall backwards on their mortgage and given the potential of resetting rates at higher levels than what someone in 2005-2007 might have got - there is certainly a good incentive for more people to fall into backruptcy.

Time will tell but the seeds are definitely there!

[DAB]

Bankruptcies climb in B.C.
Drop in real-estate values is sending homeowners to the poor house

that fast? i expect this headline to appear next year. ..not this soon.

[jimtan]

" i expect this headline to appear next year. ..not this soon."

It's normal. Financial issues always surge when the economy turns around. The important thing is to be proactive and talk to the counsellors. Make a deal sooner rather than later. It's better for your health and credit rating.

[Taipan]

As a developer, ive faced bankruptcy on 3 seperate occassions. It is a really nasty and depressing experience. It also makes you face reality in the harshest terms. Worst occasion i was given a deadline and got down to just 45 minutes before the deadline and on my last attempt before the deadline a financier was prepared to back me.

It is a nasty and soul destroying experience and when you look into the abys with no parachute, it brings one back to the key issues about you, your life and what is reality.