Source: The Canadian Press

The Office of the Superintendent of Bankruptcy says consumer insolvencies fell 12.8% in July from the previous month and were down 20.8% from a year ago.

That is welcome news, say economists, and continues a recent trend that became established over the spring when Statistics Canada began tracking large increases in job creation.

But the improvement still leaves a larger number of Canadians reporting bankruptcies than was the case before the recession.

Some 10,373 Canadians filed for bankruptcy or for a proposal to refinance their debt in July, compared with only 7,452 who did so in the same month two years ago. And last July, when the country was starting to emerge from recession, there were over 13,000 household insolvencies.

“Last year, the number of insolvencies were at all time highs so it’s just natural that things are going to go down,” noted Andy Fisher, a bankruptcy trustee with A. Farber & Partners.

“There’s still a large number of people who are filing, who are getting that protection from creditors, and there’s probably a larger number of people who are struggling and just aren’t necessarily addressing the issue.”

And with a debt hangover at 145% of disposable income, analysts say Canadians are vulnerable to an external shock, such as another economic downturn, or to higher interest rates.

A recent survey of households reported that about six in 10 Canadians said they were living from paycheque to paycheque.

The Bank of Canada has already begun hiking the trendsetting policy rate — from 0.25% in June to 1% earlier this month — although real-world interest rates on such things as fixed mortgages remain extremely low.

While it is normal to assume that as interest rates rise more households will be pushed over the edge, CIBC economist Benjamin Tal does not believe that will occur.

In part, that is because interest rates are expected to remain low by traditional standards for the next two years. Tal says interest rates will only rise if the recovery becomes entrenched, while remaining low if the economy stays weak.

“It is true there is a larger portion of the population at the margin, but this will not lead to a huge wave of bankruptcies (even as rates increase),” he added.

“When interest rates go up, it’s because the economy is doing well,” so fewer Canadians will be unemployed.

Bank of Montreal economist Doug Porter agrees jobs are more critical to household finances than interest rates, noting that the fall-off on consumer failures coincided with employment gains throughout the winter and spring.

The economy churned out in excess of 300,000 jobs in the first six months of 2010, according to Statistics Canada.

Even with interest rates at record lows, consumer bankruptcies skyrocketed as much as 56%, year-over-year, during the depth of the downturn.

One segment of the economy that appears that have been well insulated during the recession and remains surprisingly healthy is Canada’s corporate sector.

Business insolvencies fell 16.9% in July from the previous month, and were down 29.7% from last July.

Tal says Canadian businesses were well prepared for the recession, with liquidity ratios three times that of their counterparts in the United States. Many also took pre-emptive action by cutting jobs as soon as the recessionary storm hit Canada’s shores in October 2008.

“They didn’t take any chances, they cut employment and that’s why they were able to cut costs in a significant way,” he said.

But that, in turn, led to a spike in consumer bankruptcies, he added.