Canada – A safe place for corporate crooks.

Former Enron chief executives Kenneth Lay and Jeffrey Skilling were convicted on May 25, 2006 of a total of 29 criminal counts, and are likely to spend many years – perhaps the rest of their lives – in prison. Sentencing has been set for September 11, 2006.

The conviction of Kenneth Lay and Jeffrey Skilling has fueled speculation in Canada of what would have happen if they had run an energy-trading catastrophe based in Canada instead of Texas. Many people say that if this had been the case they would be heading to the golf course instead of prison.

“Canadian securities fraud enforcement is abysmal relative to the United States,” said investor advocate Diane Urquhart.

“Canadian executives committing securities offences in Canada of proportionate magnitude rarely receive criminal charges. These offences, in fact, rarely even get administrative sanctions.”

Urquhart noted that Canadian Imperial Bank of Commerce (TSX:CM) has paid more than $3 billion in penalties in the United States for its investment bankers’ role in Enron’s accounting malfeasance, but “there has not even been a reprimand” in Canada.

Canada is seen as being easy on corporate crooks. The examples of Livent Corp. and Bre-X Minerals Ltd. are cited to prove this contention.

Livent’s former chairperson, Garth Drabinsky, and ex-president, Myron Gottlieb, were indicted in New York in early 1999, but it wasn’t until October 2002 that they were charged with fraud in Canada in a case that continues to drag on in Toronto.

Bre-X collapsed in 1997, but an RCMP investigation ended in 1999 with no charges and an Ontario Securities Commission proceeding against former Bre-X senior geologist John Felderhof — for alleged insider trading — still has not been resolved.

As a practicing trustee in bankruptcy I never heard of a person being charged for a corporate insolvency crime until just recently. I am happy to see that in the last few months the RCMP and the Office of the Superintendent of Bankruptcy have cooperated in the laying of charges in connection with alleged bankruptcy fraud in Ontario. For more information on these charges please refer to these two blogs; of April 3, 2006 and January 26, 2006.

For more information on Canada’s lax enforcement please refer to this article.

Canadians’ personal debt is a record $992 billion, which works out to about $30,600 for every man, woman and child in Canada. However, this is offset by household debt’s decline relative to net worth.

The Province newspaper reported in a May 16, 2006 article by Jim Jamieson that Canadians’ personal debt is a record $992 billion, which works out to about $30,600 for every man, woman and child in Canada. Canadians’ ability to service that debt is being further challenged, as it represents 109 percent of personal disposable income.

A report released yesterday by TD Bank Financial Group urges Canadians to manage their liabilities the way they manage their assets.

Although the debt burden is high for Canadians the interest payment burden isn’t as high as it was in the 1990s. Wealth is greater because Canadian have bought a lot of appreciating assets.

“Wealth has actually been rising faster than debt,” said Craig Alexander, a TD Financial Group economist.

Trustees in Bankruptcy are very cynical about articles in the media about bankruptcy. In most cases the articles have glaring errors. In the few instances where we find a well researched and even handed story we are very pleased — and surprised. An article that appeared on May 8, 2006 in The Province, a daily newspaper in Vancouver, was particularly bad. The only excuse there is in this Internet age, for not having a well researched article, is apathy and/or laziness. This article prompted me to write a letter to the editor.

May 9, 2006.

To the Editor of the Province

Re: The article by Inez Dyer published in the Province on May 8, 2006 entitled Bankruptcy is the last resort

I am writing to complain of the disservice the captioned article did for people facing severe financial difficulty and looking for solutions. Most people trust the information published in newspapers and accept articles as containing accurate and authorative information. The article by Inez Dyer betrayed that trust by presenting an article that was poorly researched and rife with misinformation and errors.

My comments on the article are as follows:

ERROR #1: Province article, paragraph # 2: “While the bankruptcy is discharged in as little as nine months, the hit to your credit lasts seven agonizing years.”

This is a correct statement but is NOT even handed as the author fails to point out that the person facing bankruptcy no doubt has such poor credit that their credit rating is already as bad as it can get. Bankruptcy will not make it worse.

ERROR #2: Province article, paragraph # 3: “During that time, no bank, credit-card or finance company will be willing to extend you credit. If you happen to find a lender, your interest rate could reach 25 per cent or more.”

This is just not true! A person can rebuild his or her credit in as little as two years by following various proven techniques. If a person has established a good history of debt repayment after bankruptcy and has a reliable and steady income and NO DEBT, that person will be able to get credit.

ERROR #3: Province article, paragraph # 5: “One possibility is an orderly payment of debts, a formal arrangement made through credit-counselling services.”

Once again this is just plain wrong! BC does not have an Orderly Payment of Debt Program. It was shut down in 2001 or 2002 after the Liberals took power from the NDP. The provinces with an Orderly Payment of Debt program are Alberta, Saskatchewan, and PEI.

Another serious and misleading comment is that orderly payment of debt arrangements are made through credit counselling services. Once again this is just plain wrong! Credit counsellors DO NOT perform this service. For more about credit counsellors and what they do please refer to this site.

ERROR #4: Province article, paragraph # 7: “With help from a credit-counselling service or on your own, you can try to negotiate a settlement offer with creditors. By outlining the reasons for your financial disarray and proposing a one-time payment to settle your debt — based on a reasonable percentage of the amount owing — creditors may be willing to take it and cut their losses.”

This is misleading and wrong! If a debtor has enough money to make a lump sum payment the creditors will not accept this amount in full settlement of their debts. They would want this amount plus future payments from income. The best and perhaps only chance a lump sum payment has in settling a debt is to have a relative (for example) put up the lump sum payment on condition of the creditors accepting this amount or having the debtor file bankruptcy. This works best if done as a proposal through a trustee.

ERROR #5: Province article, paragraph # 11: “A consumer proposal has advantages over a bankruptcy. It allows you to repay only a percentage of your total unsecured debts without interest and retain all your personal belongings.”

This is misleading as it suggests that people going into bankruptcy do not retain all their assets. People filing a proposal or bankruptcy have exactly the same rights to retain assets. The assets that are kept in a bankruptcy or a proposal are set by the provinces and are given at this site.

ERROR #6: Province article, paragraph # 13: “.. you can declare personal bankruptcy. It must be done through a bankruptcy trustee for a flat fee of $1,800.”

This is misleading and wrong! A bankrupt must make payments based on his income and family obligations in accordance with Surplus Income Standards set by the Office of the Superintendent of Bankruptcy.

In all provinces but Alberta the minimum to be paid over 9 months is $1,665. This can be paid over the 9 months of the bankruptcy.

ERROR #7: Province article, paragraph # 17: “You remain in bankruptcy for nine months, after which you receive a court document called a “discharge of bankruptcy” that must be filed with both national credit agencies (Equifax and Transunion). Your credit rating will once again become R7 and the bankruptcy will remain on your file for seven years.”

More misinformation! The Certificate of Discharge is not exclusively a court document. In the vast majority of cases the Certificate of Discharge is prepared by the trustee at the 9th month.

The article suggests that the debtor must file the Certificate of Discharge with the credit bureaus. In fact, the Office of the Superintendent of Bankruptcy advises the credit bureaus of the discharge of the bankrupt.

Finally, the fact of a bankruptcy stays on a person’s credit bureau report for 6 years after the discharge; NOT 7 YEARS!

The results of this study should cause concern in the US especially since it is generally recognized that American bankruptcy law provides the most generous debt relief system in the world. A similar study has not been conducted in Canada. It is the writer’s opinion that a Canadian study would report similar results.

A March, 2006 study of US debtors, one year after their Chapter 7 discharge, (In Canada, Chapter 7 = personal bankruptcy) reports that one in four debtors was struggling to pay routine bills and one in three debtors reported an overall financial situation similar to, or worse than, when they filed bankruptcy.

This study corroborates a mid-1960’s US study by David Stanley and Marjorie Girth which found that one in three debtors reported, that two years after bankruptcy, they were in a similar or worse situation, than when they filed bankruptcy.

The March, 2006 study by Katherine A. Porter and Deborah Thorne concluded that the lack of steady and sufficient income was the key factor causing these debtors being worse off or in the same situation as when they filed bankruptcy. The study noted that these families are not struggling because they are misusing credit. The debts that worry them are mostly for necessities such as utilities, transportation, housing and taxes.

The study also concluded that there are limitations of bankruptcy as a social safety net and that bankruptcy is an incomplete tool to rehabilitate all of those in financial distress

On a more positive note, the study found that two thirds of debtors, one year after their discharge, were better off financially than when they filed bankruptcy. Therefore, the majority of people seeking a fresh start through bankruptcy did achieve the fresh start they were looking for.

The Conservative government may be ready to address the problem of payday loans. Federal Justice Minister Vic Toews, publicly declared that he would seriously consider Manitoba’s proposal for regulation of the industry.

Provincial authorities have been hampered in their prosecutions of payday loan abuses because they have few legal tools other than Section 347 of the Canadian Criminal Code that deems annual interest higher than 60 per cent to be illegal. The Government of Manitoba has been pushing the federal government to amend the criminal code so that the payday loan industry would be exempt from the 60% interest rate, and become subject to fees and consumer protection mechanisms regulated by individual provincial governments.

The payday loan industry has received much criticism for their near usurious interest rates. Last year, an Ottawa judge in small claims court ruled that two payday loan companies suing clients who had defaulted were exploiting the vulnerable and charging interest rates that were “unconscionably usurious.” In one of those cases, a loan of $280 rose with interest and penalties to $551 in a month, indicating an annualized rate of more than 2,000 per cent. Despite his harsh criticism, the judge ruled that the companies were entitled to repayment, though only the actual amount their clients had borrowed.

The Canadian Payday Loan Association, a group that represents the payday loan industry has come out in favour of government regulation.

More information in this Vancouver Sun article.