"Insolvency law policy is best informed by a comprehensive understanding of the policy objectives of particular measures and the practical outcomes of particular choices. Yet there continues to be a lack of empirical research in Canada in respect of consumer insolvency, its underlying causes and its outcomes. Debtors' or bankrupts' experience with the insolvency system is almost impossible to gauge with the data now collected. Research funding for legal, economic and sociological scholars in the insolvency area continues to be very limited. This paper examines current challenges and strategies for empirical research on consumer insolvency in Canada. It explores options for researchers to access insolvent debtors who have utilized the procedures under theBankruptcy and Insolvency Act (BIA), including how data could be more meaningfully collected and analyzed. The paper also explores the serious lacuna in information on debtors who have not accessed the insolvency system, but who may be experiencing severe financial distress. Scholars have observed that such individuals may not be able to afford bankruptcy or that they are deferring filing for longer periods before seeking the relief offered by insolvency law. Deferral of filing may unnecessarily exacerbate debtors' financial distress. Absent accurate information, it is difficult to understand how the system could be made more accessible for consumer debtors.
A working hypothesis of the project was that there is not yet adequate empirical research on consumer insolvency in Canada such that our policy decision making is fully grounded in experience and informed decisions. Good empirical data assist with sound and informed policy-making. Insolvency professionals, community members and government policy-makers want some assurance that their policy choices are advancing the overall goals of the bankruptcy and insolvency system. In addition to good design that tests assumptions and underlying policy goals, better data collection design may also have the effect of beginning to empower those debtors who have accessed the system in terms of allowing them to communicate their experiences more directly withpolicy-makers. The study offers an assessment of effective research methodology for accessing insolvent individuals, which may enhance future research in the area of consumer insolvency. It makes a number of recommendations for enhancing data collection and analysis while respecting the privacy and dignity of consumer debtors.
Part II sets out the methodology of the study. Part III examines the scholarly literature in Canada, the United States, Europe and Australia, making a number of observations in respect of methodologies utilized in previous studies and how they can inform Canadian empirical study of consumer insolvency. The study also examined the literature more generally on surveying vulnerable populations to assess whether there are helpful policy or system design observations that can be applied to the consumer insolvency context. The literature was used to formulate questions for the survey; and requisite ethics and governmental approvals were sought and received. Part IV analyzes survey and interview responses from 33 legal, medical, business and sociology scholars, and from 43 insolvency professionals, in terms of their observations in respect of enhancing data collection. Part V examines current ethics considerations in research under the Canadian university system. Part VI concludes with several immediate recommendations for potential future research initiatives. It is hoped that this paper is the beginning of a dialogue in Canada in respect of creating a broad-based accurate system of data collection and analysis with a view to enhancing consumer insolvency law.
Overall, the study found that there have been no broad-based longitudinal empirical studies of consumer insolvency in Canada. While Canada for many years generally lacked empirical research, in recent years some efforts have been undertaken to develop projects, still somewhat limited in their scope. The Office of the Superintendent of Bankruptcy (OSB) has aided considerably in this change, as has the Canadian Insolvency Foundation, but underfunding for research continues to be a serious problem. There is growing recognition that the methodology must be aligned with and responsive to the research questions and working hypotheses; and must be described so that others assessing the data can understand their strengths and limitations.
In contrast to Canada, there is a rich body of literature in the United States (U.S.). In particular, there has been important scholarship generated through collaboration in the Consumer Bankruptcy Project, a broad-based multidisciplinary longitudinal research program initiated in 1981 by scholars Teresa Sullivan, Elizabeth Warren and Jay Westbrook. Each study has increased the number and type of discipline of participating scholars. The Consumer Bankruptcy Project, to date, consists of four empirical studies of the economics and demographics of consumer bankruptcy debtors, undertaken from 1981 to 2007 for individual debtors filing under the U.S. Bankruptcy Code. Each new study has built on previous information, creating a longitudinal set of data that allow scholars to track developments in a meaningful way. However, each study also added to both the methodology and the scope and type of data collected as scholars have acquired more experience in collecting data, identifying key data points, and reflecting financial and legal changes. This study also examines empirical research by Angela Littwin and others who offer strategies for reaching low-income debtors that have not accessed the formal insolvency system. U.S. scholars have been innovative and comprehensive in their methodologies, offering important insights into research design and execution and the substantive law.
In the United Kingdom (U.K.), the greatest interest in empirical analysis has followed on the heels of 2004 insolvency law reforms in which bankruptcy discharge was made more available to consumer debtors. In early 2009, John Tribe published one of the first empirical studies in the U.K. Tribe conducted a pilot questionnaire-based study involving bankruptcy courts in England and Wales. His current work involves an expanded survey of more bankrupts in an expanded sample of bankruptcy courts, capturing consumer bankruptcy, individual voluntary arrangements and debt management agreements, and wider issues relating to debtor advice and education for debtors. Part three of the research will involve an investigation of bank lending practices to consumer debtors. Adrian Walters has also recently examined individual voluntary arrangements; hence,U.K. scholars are currently at the forefront of various research initiatives that will elicit more comprehensive and insightful information, allowing for the first comprehensive empirical work on consumer insolvency in that jurisdiction.
Once one moves beyond the U.S., U.K. and Canada, there is little empirical scholarship in either English or French. In part, this lack of research may be due to the recent nature of consumer debt forgiveness programs in Europe and other countries. Canvassing Australian insolvency literature did not reveal any recent empirical studies in Australia. The most significant research undertaken to date was conducted by Professor Martin Ryan, from the social work discipline, who examined the post-bankruptcyexperiences of consumer debtors, and the perceptions and experiences of a sample of undischarged consumer voluntary bankrupts through a comparative literature search and interviews. Ralston, Mason and Kumar undertook a macroeconomic analysis of consumer bankruptcy in Australia in 2001 using a multivariate regression model.
Previous studies and the surveys of scholars, trustees and credit counsellors reveal that there continues to be a disconnection between debt that consumer debtors are incurring, lending decisions in respect of that debt and public policies aimed at promoting a fresh start. In Canada, there is little research measuring change in the demographic profile of debtors and larger economic trends. There is little that tracks how changes to insolvency and other social policy and the availability of resources through social safety nets have affected consumer indebtedness.
Funding should be made available for two types of research. First, there is a need forbroad-based gathering of detailed information on a longitudinal basis that allows researchers to develop hypotheses and test the data. Second, there is a need for more focused research where there is a working hypothesis and research questions and methodology formulated to measure its validity. This study makes several recommendations regarding future research, including both quantitative and qualitative empirical research.
Canada's policy decisions would be considerably enhanced through the use ofbroad-based multidisciplinary longitudinal studies commencing immediately and tracking the effects of recent and proposed insolvency law reform. A good start has been made through the OSB's E-Filing and data collection initiative, but to date that initiative is limited in what information it collects, how it can be analyzed and how it informs public policy. Canada can benefit from the extensive experience of U.S. and other scholars, including the considerable thought that has gone into the design of the research methodology, survey techniques and substantive questions asked. An important feature of such studies is direct contact with consumer debtors, as described in the next recommendation. Such studies would allow for collaboration among economic, legal, administrative and political science scholars, offering greater insights and better future research design.
Extensive questionnaires and interviews are a critically important feature of research generated by the Consumer Bankruptcy Project in the U.S. and the PIP project in theU.K., matching the information gathered in that process with the data in court or administrative files. While the complexity of each debtor's history is unique, the interviews across a large cohort have enabled patterns to be established. One real strength of the Consumer Bankruptcy Project as it has evolved is not only the ability to compare global data over an increasingly extended time period but also the ability to use interviews conducted with consumer bankrupts one year and three years after filing for bankruptcy as a measure of outcomes of the bankruptcy process. Consumer debtors have had some important insights into the process, their longer term ability to become or remain solvent, and broader social and economic challenges that they face.
Canada would benefit tremendously from a project that systematically accesses consumer debtors immediately after, then one year and three or five years after, the process in order to better assess how utilizing various procedures under the BIA assists in financial rehabilitation over the short to medium term.
All of the U.S. empirical studies offer compensation to survey respondents. Interviews with scholars reveal that this economic incentive is not only a means of encouraging participation in the detailed interviews but also a means of recognizing the value of debtors' time and providing a degree of respect in that they are compensated for their insights and observations. Such compensation needs to be factored into Canadian funding for such studies as does the highly labour-intensive nature of training interviewers and conducting such research.
A great deal can be adopted from survey and interview methodologies from the U.S.Consumer Bankruptcy Project. Creating space within the survey or interview for debtors to tell the stories of their insolvency in their own words can provide a deeper picture, but can also identify literacy and language issues. It is important to offer debtors definitions and synonyms to assist them in providing complete responses and to allow respondents to ask questions about ambiguities in the questions or to clarify responses in terms of understanding what debtors are trying to communicate about their experience. Both closed and open-ended questions should be used. The high response rate in the Consumer Bankruptcy Project has been due to the multi-faceted strategy of data collection. Tests of inter-coder reliability and coding error procedures can assist with a high degree of data quality.
Utilizing computer-based survey and interview technologies should also be considered. The OSB could assist in developing a methodology and the technology that could be used by scholars in a number of disciplines to gather data on insolvent or financially distressed debtors.
Critically connected with the need for longitudinal data is the need to understand how the nature of indebtedness is changing. The most recent Consumer Bankruptcy Project in the U.S. documented how consumer debtors that filed under U.S. bankruptcy proceedings are deeper in debt than previously, with much higher debt-to-income ratios and greater short-term high-interest-rate debt. As noted above, scholars speculate that credit card and other short-term high-interest lenders encourage debtors to delay filing, to pay interest charges for a longer period of time and to increase their indebtedness before they file. Earlier studies in Canada, the U.S. and the U.K. found that while credit enforcement measures by creditors before bankruptcy filing were relatively rare, the sale of debts to debt-collection agencies, harassment by such agencies, and phone calls to friends and relatives were a consideration in the timing of filing. Payday loans and other alternative financing systems may be contributing to the deepening of insolvency, but they may also be offering an important means of financing very poor debtors.
We need considerably more understanding of the extent of this phenomenon in Canada. It is particularly timely that research is being undertaken in this area in order to formulate policy responses to the practice of high-interest short-term debt and the lack of alternative affordable community-based financing for the lowest income debtors.
Scholars, practitioners and government need to work together to find ways to access debtors that are experiencing financial strain and have not yet accessed the formal proposal or bankruptcy system. This problem is large and systemic. It involves not only credit education and providing free credit advice but also larger social and political issues in respect of social safety nets that protect debtors from income shocks and other disruptions to their income stream. U.S. data suggest that debtors are struggling longer, with more debt, than previously, and deferring filing under insolvency legislation can deepen their indebtedness and make it difficult to make a fresh start.
Research is needed into the degree to which debtors are struggling in this way and what public policies need to be adopted to address the problems. What considerations do lenders use to make lending decisions and does this affect the availability of credit where the debtor has no realistic way of paying off the debt? What factors encouraged or enabled debtors to accrue debt that was beyond their capacity to meet their obligations? There appears to be a distinction between loans for mortgages, leaving aside the sub-prime issue, which occurred primarily in the U.S., and other secured lending, where there is due diligence by the lender to ascertain if there are assets to cover the value of the loan, and unsecured debt, such as credit card debt.
There should be more systematic consideration of how credit counsellors or trustees could be used to identify debtors that have not yet accessed the insolvency system, keeping in mind the problem that debtors do not yet have the benefit of the stay protection before they file. The suggestion by credit counsellors that on intake perhaps a client could be offered the opportunity to visit a website where confidentiality is assured and complete some key questions as openly and honestly as possible should be explored.
The OSB could also consider broader proactive measures, such as working with the community and other government agencies to set up free debt advice clinics, exploring what has been most effective in the U.K. or elsewhere. Aside from insolvency issues, it would seem that support at a much earlier stage of financial distress could be helpful. These strategies would have to be multi-faceted and developed with the participation of consumer debtors, insolvency and credit professionals, scholars, legal clinics and other stakeholders in the community.
Research on prevention of over-indebtedness is urgently required; for example, on interest rate ceilings, guidelines in respect of mortgage lending, broad-based educational strategies, development of financing alternatives that are affordable and accessible, more general social safety nets and long-term economic sustainability strategies. Some preventive measures are likely to be highly contested, such as controls on granting credit. Absent solid data and research into comparative strategies, Canada will be unable to devise meaningful and practical strategies to address consumer insolvency.
There is a disconnection between research that has already taken place andpolicy-making. In undertaking this study, we were struck by some of the cogent recommendations for reform that were made over the past decade, but which did not enter public policy debates during this round of legislative reform. The OSB could play an important role in creating an ongoing public policy committee that would examine recommendations from each research study and, where appropriate, develop strategies to begin to adopt those recommendations. There could be representation from a broad set of interests in those policy discussions.
There should be policy guidelines promulgated by the OSB in respect of conducting research that directly accesses insolvent consumer debtors, building on university ethics guidelines, and respecting the privacy and dignity of consumer debtors while allowing accurate collection of data. There are ethical and practical issues in identifying debtors outside of formal proceedings, particularly as they may be left vulnerable to creditor action if they participate in studies. There is also the risk of causing more stress to debtors at a time when they are already experiencing distress and may not yet have found a remedy. There are also selection bias problems in terms of an inability to know whether or not a cohort of such debtors constitutes a representative sample. The OSBcould play an educative role with university ethics boards in Canada, highlighting the nature of consumer insolvency, the trustee-driven system and the ethical issues faced in accessing such debtors. It could also play a facilitative role in encouraging boards to defer to the ethics approval of other universities where there are multiple collaborators.
There is much to be learned from empirical research. It can draw on the insights of multiple participants in the system and better inform policy choices. Different kinds of research may meet different policy needs. Broad-based multidisciplinary longitudinal research allows for collection of detailed information on a longitudinal basis, which can be used by many scholars and policy-makers to develop hypotheses, test the data and make sound policy choices. More focused research, which develops a methodology based on clear research questions, can provide meaningful data on focused topics. Research questions should be clearly identified so that the methodology selected is appropriate, recognizing also its limitations. Both kinds of research are highly informative and very much needed in the consumer insolvency area. This paper offers a number of insights into how we can enhance our current research and policy processes through collaboration among the OSB, the insolvency and credit profession, and social science researchers. The result will be a better-informed policy-making process provided with the tools to assess both needed reforms and the effectiveness of past initiatives."
Picture Credit: http://www.iam.ubc.ca/ubctour/iam-ubc3.JPG