Published December 4, 2015
Of all of the lousy things that can happen to someone, it doesn’t rank as the very worst. Still, being forced to file personal bankruptcy comes with some embarrassment and shame. It also makes it much more difficult to re-establish a proper credit rating, which makes it tough to borrow in the future.
Given the state of Alberta’s energy sector and the general economic recession that has settled across the province, one would assume that personal bankruptcies in the province would be skyrocketing. It’s been 18 months since oil prices started to nosedive. Job losses in the petroleum sector have taken a nasty toll and Alberta borrowers have racked up the highest levels of household debt in the country.
But in one of those apparent twists of logic that so often confound our expectations, personal bankruptcies in Alberta have risen only fractionally. Over the past complete twelve months, to the end of September, 2015, bankruptcies are up by only 100 (2.5 per cent) compared to the previous twelve months. And they’re still nowhere close to levels seen in 2009 (see chart).
While on the surface this may be surprising, there are a few factors that help explain why bankruptcies are well-contained – at least for now.
The first is employment levels. True, there have been an estimated 25,000 jobs shed in Alberta’s oil and gas sector over the past year – and most of those jobs were well-paying. But in fact, overall employment in Alberta is still higher compared to a year ago. As of October, employment in tourism, construction, education, public administration and health and social assistance are up, year-over-year.
These jobs are generally lower-paying than those in the petroleum sector. But some unemployed oil patch workers have been able to pick up work in these other sectors. As well, many households have at least two income earners. So even in cases where one income was lost, the other income earner is still probably working. That’s propped up total household income and has prevented bankruptcy.
The second factor is the severance packages that have been extended to many of those laid-off Albertans. Certainly, not every worker has been fortunate enough to see a healthy cash severance payment (some may get only a cheque for two weeks’ pay, if that). But workers in management, or in technical, professional and scientific occupations – many of them the white-collar workers in downtown Calgary who are facing job losses – are regularly given between four to eight months of severance pay. Often it’s even more. This has certainly helped households manage their debt payments.
But the third factor is perhaps the most significant: Interest rates have remained near record lows. Making the minimum payment on a line of credit, a car loan or a monthly mortgage is not a smart way to manage debt, especially not in the long run. But in the event of a sudden loss of income, making the minimum payment is just enough to prevent default. The low interest rate reduces those minimum payments. In other economic downturns – especially the 1980s when interest rates were high – scraping together the minimum payment on a loan was more difficult.
For all of these reasons, we have yet to see consumer bankruptcies in Alberta rise anywhere close to 2009 levels. But no one should be too complacent about this. Rather than preventing bankruptcies, these factors are probably just delaying them. Generous severance packages and low interest rates can carry you for a while, but unless there’s a major rebound in Alberta’s economy very soon (and that’s unlikely), we can anticipate bankruptcy rates to steadily rise in 2016.
Todd Hirsch is the Calgary-based chief economist of ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline