Bankruptcies fall again in May

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Canadian personal and business bankruptcies continued to slide in May from a peak reached last June, but experts don't expect levels to recede to pre-recession lows any time soon.

The federal bankruptcy office says the total number of filings dropped to 11,526, down nearly 13 per cent from May, 2009. Consumers made 12 per cent fewer bankruptcy and insolvency filings, while business filings dropped 29.8 per cent.

There was an 11 per cent month-to-month decline between April and May, partly reflecting a seasonal trend and an economic recovery.

The monthly insolvencies data, which include bankruptcies and proposals for settling debt under duress, suggest the strong economic recovery that began last fall has improved the financial circumstances of Canadians.

But experts warn the number of Canadians filing for bankruptcy and insolvency remains historically high, as consumers take on record high debt-to-income ratios and interest rates start headed higher.

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"It is a positive story, things are improving, but we should be cautious about the pace at which they will continue to improve," said Grant Bishop, an economist at Toronto-Dominion Bank.

"We are on a down slope but insolvencies won't continue to improve as rapidly," he said, adding that insolvency levels are still much higher than they were in August, 2008, before the recession hit.

Bankruptcy trustee Doug Hoyes said May's relatively high figures seem positive only when compared to the record high numbers reported in 2009 - the busiest year ever for insolvency filings at his firm Hoyes Michalos and Associates.

"If you compare [May]to a year ago, yeah, numbers went down, but if you compare it to two, three, four, five years ago they're still up," he said.

"Ultimately, it's because the consumer is still carrying a huge amount of debt."

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Over the 12 months ended May 31, there were 153,248 insolvency filings in all, a 10 per cent increase from 139,003 in the year ended May 31, 2009. The annual increase was "entirely due" to an increase in consumer insolvencies, the superintendent's office said.

Meanwhile business insolvencies fell 13 per cent compared to the 12-month period ending last May, driven by a reduction in filings in the transportation, warehousing, and construction sectors.

Insolvencies are closely linked to unemployment rates, and in the last three months ending in June, the economy created a massive 227,000 jobs. The jobless rate has gradually declined from last summer's high to the current 7.9 per cent.

The Conference Board of Canada reported Monday its Help-Wanted Index rose 1.6 in June to reach 98.2 and the ninth increase in the past 11 months. It now stands 14 percentage points above its July 2009 level.

The trend can be attributed to positive employment numbers reported in the first half of the year and the June increase suggests further employment growth in the near term, the Conference Board said.

Mr. Bishop said employment figures should continue to be solid as firms struggle to meet demand and seek out additional labour but he added the pace of jobs being added to the economy will slow in the second half of the year.

"Looking forward, the drivers of economic activity in Canada have largely been from the consumer sector and that is necessarily going to wane. That does imply that the pace of improvement- in the absence of improving conditions stateside or a very strong move by firms to invest- will slow."

The Bank of Canada last week increased its trendsetting rate by a quarter point to 0.75 per cent. And, Mr. Hoyes said, interest rates will inevitably creep higher and consumers should start reducing debt now.

"Now is the time to do what you can to get your debt under control so if interest rates do go up you're carrying less debt and you're more insulated from it."

Insolvencies have backed off their peaks of last year, but Mr. Bishop projects that insolvency levels could continue to hover around May's levels for some time.

"[Insolvencies are]improving in the near-term but we're still at a high level relative to history," he said.

"Households will again face in the coming years ... higher debt service levels and unemployment- although it will improve - won't be returning to pre-recession levels either."

Mr. Bishop says 12-month figures in May, 2011, will decrease again from the 140,000 to 150,000 reported this year and last, but will be higher than historical averages of 110,000 to 115,00 per year.