Kenneth Nantel seemed unbothered by his bankruptcy.
It was his fourth in 10 years, during which time he had relied on Canada’s insolvency system to rid him of more than $100,000 in debts.
This time, the buck was going to stop. The judge overseeing the case had had enough. Nantel, she ruled, did not deserve yet another fresh start.
“He’s shown no reluctance of using bankruptcy to be freed from his debts,” the judge, known as a registrar, wrote in a 2012 decision. “His past conduct demonstrates a contempt for the rights of his creditors.”
Discharging Nantel of his fourth bankruptcy — liberating him of the debt that led him into insolvency — would undermine the integrity of Canada’s bankruptcy system, the registrar said. She denied his application.
Nantel, who refused to comment for this article, persisted.
Four years after the 2012 ruling, Nantel, now working as a mechanic and living 120 kilometres east of Montreal, went before a different registrar and received a discharge from that same bankruptcy.
And eight days after that, he declared bankruptcy for a fifth time, owing more than $37,000 in new debts.
Nantel is one of a staggering number of Canadians who are washing themselves of their debt by re-using a bankruptcy system meant to rehabilitate honest but unfortunate debtors, a joint investigation by the Toronto Star and La Presse has found.
Bankruptcy system insiders and observers are surprised at the magnitude of the nationwide problem revealed in the investigation’s data analysis.
One in five Canadians who filed bankruptcy in 2018 was doing it for at least the second time. That works out to 11,500 debtors who filed their second, third, fourth or even fifth bankruptcy, according to data obtained from the Office of the Superintendent of Bankruptcy.
Last year alone, 20 Canadians filed their fifth bankruptcies.
“One fifth-time bankrupt is probably one too many,” said Thomas Telfer, a law professor at Western University who has authored the country’s most detailed research on repeat bankruptcies.
“It shows that the bankrupt has not received the message.”
In cases of repeat bankruptcies, the courts have said focus is expected to shift from rehabilitating a debtor to protecting the public and the system from being abused.
Yet, despite the courts’ stern rhetoric, government data shows the vast majority of completed proceedings end with the person released from their debts.
The Star and La Presse have interviewed dozens of debtors and insolvency experts, including the trustees that administer bankruptcies and retired court registrars who previously presided over bankruptcy cases.
Many repeat bankrupts are people marred by bad luck, their lives sideswiped by job loss, divorce, illness or other tragedies that catapulted them back into insolvency.
Others, however, rack up the same kinds of debt over and over, then turn to bankruptcy for what the courts have called a “fiscal car wash.”
“In some segments of society, it’s become almost a game. People take advantage of the system and they take advantage of the leniency of the registrars,” said Yoine Goldstein, a retired Canadian senator and lawyer who led a task force advising the government on potential reforms to Canada’s insolvency laws.
“Society is bearing the cost of repeat bankruptcies,” Goldstein said.
Unpaid taxes owed by repeat bankrupts make up a portion of the nearly $4 billion the Canada Revenue Agency has written off since 2009 because of consumer and commercial insolvencies. In Quebec, the provincial tax agency has lost nearly $2 billion to insolvencies in the last five years alone.
Meanwhile, credit card lenders absorb the cost of bankrupts who do not pay their bills by charging high interest rates to their customers who do pay their debts.
The Star/La Presse investigation has also found the problem of repeat bankruptcies is greater in Quebec, home to an overwhelming number of the country’s third-, fourth- and fifth-time bankrupts.
In some cases, such as Nantel’s, four- and five-time bankrupts have shed their debt more quickly and easily than had it been their second bankruptcy.
When a person declares bankruptcy, a trustee sells whatever assets are available and distributes the proceeds to creditors (some assets, such as clothing and registered retirement savings that are more than one year old, are protected).
In some cases, when the bankrupt’s income exceeds what a government formula deems necessary to maintain a reasonable standard of living, the debtor must make “surplus income” payments, increasing the amount of money creditors recoup.
The bankruptcy is over when the person gets discharged — a release from the legal obligation to pay back what was owed, though it does not cover certain debts such as child support or alimony.
Unless someone such as a creditor opposes, a first bankruptcy is automatically discharged in nine months or 21 months. The second bankruptcy can be automatically discharged in two years or three years.
Subsequent bankruptcies go to court, where the judge can grant a discharge or refuse it. If granted, the discharge is completed after a delay, known as a suspension, or with conditions, such as the debtor having to prove he is up to date with his taxes. Often, a discharge comes with both a suspension and conditions.
Although the total number of consumer bankruptcies is going down year over year, the percentage that are repeat bankrupts has steadily climbed.
Third-time bankrupts have become common in some provinces. Fourth and fifth bankruptcies, once almost unheard of, are now “a scourge,” registrars have said, and “a clarion call to systemic integrity and to the court’s role in it.”
Repeat bankrupts include real-estate agents, roofers, restaurateurs, tax lawyers and drywallers.
With each bankruptcy, they are required to take two financial counselling sessions. Some debtors, however, take away the wrong lesson.
“They go through bankruptcy and they learn, frankly, how easy it is and how forgiving it is. Then think, ‘Gosh, why don’t I do it again?’ ” said John Owen, whose previous business helped credit lenders pursue claims against insolvent consumers.
Owen testified in 2003 before a Senate committee reviewing Canadian insolvency laws, and he warned of the country’s disproportionately high rate of repeat bankruptcies.
At that time, about 10 per cent of bankruptcies filed were repeats. That rate has now doubled.
“There’s a cost to it. No question. There is a societal cost,” he said.
It’s unknown how much lost tax revenue can be attributed to repeat bankruptcies. One thing, however, is clear: The government, sometimes, only recoups pennies on the dollar, if it gets anything at all.
Three-time bankrupt Jacques Bélanger has racked up mountains of tax debt to the CRA and Revenue Quebec. After the Laval man’s meagre assets were picked over in his most recent bankruptcy, filed in 2014, the CRA, owed more than $101,500, received just $59.20 — less than Belanger spent a month on cigarettes.
“I want to make clear that I never exploited the system. I was just unlucky,” Bélanger said in an interview.
There are few debts more important than the payment of taxes by those enjoying a good income, said registrar Nathalie Champagne in 2017 when faced with Charles Rotenberg, a former Ottawa tax lawyer. Rotenberg, who surrendered his licence after the law society found he misappropriated a client’s funds, was on his third bankruptcy, this latest leading the CRA to write off $313,000. “The Bankrupt before me has enjoyed a good income and he has not paid his fair share of taxes which is unfair to the rest of the tax-paying public.” She refused his discharge.
Rotenberg travels every year and lives in a five-bedroom house bought by his wife and works as a consultant, Champagne noted in her decision, adding “his life and lifestyle have been seemingly unhampered by his third bankruptcy.”
Rotenberg told the Star he drives a Honda. The other car in the driveway, a dark grey 2018 Cadillac sedan, is registered to his wife, vehicle records show. He said that when he travels, it is to visit family. The money that the law society found he misappropriated has been paid back, he said. His consultancy’s website says he helps clients with “Dispute resolution with the Canada Revenue Agency.”
Rotenberg said he assumed substantial liabilities from a business partner who had been managing the books which, coupled with serious health problems, left Rotenberg unable to work and continue to pay creditors and led to his third bankruptcy. He said the court will not let him re-apply for his discharge until 2021.
The courts can refuse a discharge when the debtors’ behaviour has been particularly reprehensible.
In 2015, a Quebec court decided it was the best way to handle the fifth bankruptcy of Stéphane Flynn. In an interview, Flynn blamed his bankruptcy on runaway costs in his construction business and clients who didn’t pay on time. In reviewing the case, the judge saw a man with more than $500,000 in debts who treated bankruptcy as a way to escape his debts.
“It is extraordinary that he has been allowed to do so multiple times without opposition to his release,” registrar David Cousineau wrote in his decision to refuse Flynn’s discharge.
Except it was not extraordinary. Discharge has become routine for repeat bankruptcies.
Of the 395 proceedings involving fourth- and fifth-time bankruptcies that were completed between 2011 and 2018, just 21 resulted in a discharge being refused, according to federal data. That’s five per cent.
In every other case, registrars gave a conditional or suspended discharge. (The majority of fourth- and fifth-time bankruptcies filed during these years have not yet had a discharge ruling, according to the data).
The willingness to grant discharges marks a notable shift from how courts historically treated repeat bankruptcies, their decisions guided by an often-quoted judgment that a “third bankruptcy is one too many.”
“Third-time bankruptcies are of grave concern, often demonstrating a degree of irresponsibility that justifies simply refusing a discharge,” Manitoba Justice Colleen Suche said in 2012 in upholding a decision to deny a three-time bankrupt a release, forcing him to re-apply in a year.
Michael Bray, a retired registrar in New Brunswick who presided over insolvency hearings from 1999 to 2013, said the stigma surrounding bankruptcy has diminished. He said stiff sanctions can be used to dissuade a debtor from returning to insolvency.
“It used to be that most people that came for their first-time bankruptcy…a lot of them never wanted to be here again. I think that feeling is gone now,” he said.
“If the courts don’t impose a good sanction, then it’s not difficult to be a three-, four- or five- (time bankrupt).”
Canada’s Superintendent of Bankruptcy, whose office regulates and supervises the insolvency system, would not be interviewed for this article.
In written answers, her office said insolvency laws contain “safeguards against potential abuse,” and the decision to discharge a debtor with three- or more- bankruptcies is a matter of judicial discretion based on the circumstances of each case.
Some trustees say the court’s shift stems from repeat bankruptcies becoming more common and, as their shock value dissipates, registrars are growing more sympathetic to how financially tenuous many Canadians have become.
Another theory is that registrars, aware that creditors almost never attend court to oppose discharges, are asking: If the people owed money don’t care enough to be here, why should I dole out a harsh penalty?
“That was the frustrating part of that job. You’re supposed to be somewhat of a gatekeeper but no one is complaining,” said Scott Nettie, a registrar in Toronto bankruptcy court from 2005 to 2012 with a reputation of coming down hard on debtors who misused the system.
“I know there are registrars across the country who, in those situations where no one is there (opposing discharge) and no one is complaining, they’re like, ‘go forth and sin no more,’ ” Nettie said. “Then there are others, and I was one of these, who struggled with: ‘But it’s not right.’ ”
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Among the least engaged creditors, according to Nettie and other trustees and registrars, are credit card companies.
Credit lenders rarely oppose a discharge and once discharged, many repeat bankrupts have little trouble securing more credit.
A Nova Scotia man filing his fifth bankruptcy had amassed more than $20,000 in credit card debt, even though two of his earlier bankruptcies remained on his credit report. A businessman from Collingwood, Ontario, had 10 cards in his wallet and owed more than $64,000 when he filed his third bankruptcy in 2014.
Those credit card companies may only recover a portion of what they’re owed.
“They don’t care,” said Nettie. “They’ve already costed the price of losing that part of the business completely into what they charge the rest of the paying customers. Why would they pay good money after bad to pay someone to come (to oppose in court).”
A spokesperson from the Canadian Bankers Association said the country’s banks are prudent lenders that only offer credit to borrowers they believe can and will repay the loan.
Losing money to a four-time bankrupt was not something Dieter Gauger could easily absorb. In 2013, Gauger, a retired millwright, and his wife Edith hired a Hamilton contractor to renovate their Stoney Creek townhouse.
The contract said the work would cost $65,000. But after collecting $60,000, the contractor, Stephen Monahan, left the house unfinished and unliveable, Dieter said. The Gaugers drained thousands from their retirement savings to pay someone else to complete the renovations while they stayed in a Super 8 Motel. The Gaugers took Monahan to court, where in 2015, they got a default judgment for nearly $36,400.
But Gauger does not expect to see any of that.
Two months after the court order, Monahan filed for bankruptcy, his fourth. Described by one registrar as “a menace to credit system,” Monahan told the court his first three bankruptcies were his own fault, the consequences of poorly managing his business. His latest, with nearly $93,000 in debts, was the result of cancer, he said. He said his prognosis is grim.
“I’m very sorry to the people I owe money to and I’m sorry for my failures,” he told the court at his October hearing. Citing his poor health, the court issued Monahan a suspended discharge. He can be free of the debts as early as summer 2020, as long as he pays roughly $1,600 in outstanding administration costs.
For Gauger, it doesn’t feel just.
“I lost $36,000,” the 76-year-old Gauger said. “The system worked for Monahan but not for me.”
The problem of repeat bankruptcies is particularly prominent in Canada’s eastern provinces.
Since 2011, Nova Scotia has had the most repeat bankruptcies per capita in the country with 75 for every 100,000 residents — more than double the national average.
The high rates are likely fueled by a combination of low wages, an unstable job market and a high cost of living, especially in places like Cape Breton, said Rob Hunt, a trustee with Grant Thornton based in Nova Scotia.
“We find people have then relied on credit to bridge their income,” he said. “People finally get to the boiling point where they’ve exhausted their credit and they can’t afford to keep making the monthly payments.”
More than half of the roughly 9,360 Canadians who filed their third bankruptcy between 2011 and 2018 lived in Quebec. For fourth-time bankruptcies, Quebec’s portion climbs to 74 per cent.
And of the 88 Canadians who declared bankruptcy for a fifth time, almost all of them — 90 percent — lived in Quebec.
Insolvency experts within Quebec say they are stunned by the numbers but offer a variety of possible reasons.
Quebec is the only province going back to the late 1980s that has consistently had higher rates of consumer bankruptcy per capita than the national average.
The province has among the lowest rates of disposable income per resident in the country, which could mean fewer Quebec debtors can afford to settle their debts through scheduled payments under a consumer proposal and instead opt for bankruptcy. A consumer proposal, another form of insolvency, is a settlement in which a debtor repays a percentage of what is owed and is an alternative to bankruptcy.
Research has found French-speaking Canadians scored lower on financial literacy than their English counterparts.
The Quebec numbers are also partially due to inconsistencies in the sanctions imposed on bankrupts from courthouse to courthouse and province to province.
How it is supposed to work is spelled out in the Bankruptcy and Insolvency Act. A first-time bankrupt will be automatically discharged after nine or 21 months, unless there is opposition. Changes introduced in 2009 allow for automatic discharges for unopposed second bankruptcies with a waiting time of two or three years. Subsequent bankruptcies must go to court where a judge decides on sanctions.
This is where the system’s consistency unspools.
In Toronto, trustees say the court will postpone the discharge hearing of a third-time bankrupt for at least three years, then delay a discharge for another nine or 12 months.
“The court is of the opinion that a third-time bankrupt shouldn’t be able to get out faster than a second-time bankrupt,” said trustee Mark Morgan from David Sklar & Associates.
But that’s not how it works across the country. In 2018, a labourer living in small-town Quebec was discharged from her third bankruptcy just two years after she filed it. A year later, she again declared insolvency, this time filing a consumer proposal.
Consumer proposals have overtaken bankruptcies as a preferred way to handle debt, particularly in provinces such as Ontario. However, the federal government says it does not track repeat proposals, meaning the rate of repeat insolvencies may be much higher than the data suggests.
The government’s 2009 changes also inadvertently softened oversight, shielding debtors from the scrutiny of the courts until they arrive before it for a third time, according to some trustees and one former registrar.
“This may signal that going bankrupt twice is not as serious as it is. This may be in part what’s led to an increase in recidivism,” Morgan said.
Joseph Cloutier is a 48-year-old drywaller in Toronto who, at his peak, could bring in $4,000 a week. But he never put money aside for taxes. When he filed his first bankruptcy in 2008, he owed the CRA $22,000; during his second, in 2011, he owed $60,000. He received automatic discharges both times.
In 2016, Cloutier again filed for bankruptcy. His CRA debt: $124,000.
“I’m terrible at managing money. I’ve been terrible all my life,” Cloutier said. “I’m one of these people with an addictive personality. If you’re going to give me a million dollars, I’ll spend it all by next week.”
In November, a Toronto court ruled that Cloutier could be discharged from his third bankruptcy in 15 months with conditions, including that he first pay the CRA debt that had been mounting since he filed his latest bankruptcy.
Law professor Thomas Telfer said the law should be tightened so cases like this, in which a second bankruptcy is filed within three years of the first one being discharged, do not qualify for automatic discharge. Instead, the debtor would go to court where a registrar can determine whether the debtor is honest but unfortunate or abusing the system.
A decade ago, trustee Mark Morgan co-wrote an article about “the revolving door of bankruptcy” and the rising rates of recidivism. Still, he says it “blows his mind” to learn from the Star and La Presse that 88 Canadians have declared bankruptcy five times since 2011.
“It shouldn’t be that easy,” Morgan said. “They’re basically thumbing their noses at the system. I know you can’t do anything to me because you haven’t the first, second, third or fourth time.”
His article outlined strategies to stem what he saw as a growing problem. They included more financial education for youth and new Canadians, more consistent sanctions and expanded counselling, as the two sessions required under the Act aren’t enough to fix “a lifetime of bad” financial behaviour, he said.
“Recidivism will continue to be a problem as long as society, creditors, the courts and the insolvency community allow it to be,” Morgan warned.
In May 2016, seven years after Morgan’s call to action, Kenneth Nantel was again seeking to get liberated from more debt.
It was Nantel’s fifth bankruptcy in 16 years, filed just eight days after he was discharged from his fourth. Much of the $37,000 he owed was to the government, and he blamed his money problems on a loss of income.
He was earning roughly $3,300 a month as a mechanic, enough for him to make surplus income payments to increase the amount of money his creditors would receive.
“If it was his second bankruptcy, the debtor would have to pay a total of $17,748 over 36 months,” Nantel’s trustee noted in his submissions.
Even though it was his fifth bankruptcy, the registrar ordered Nantel to pay only $5,916.
When reached by phone, Nantel refused to comment. “I’m not really interested in talking about what happened in the past,” he said before hanging up.
Nantel can be discharged from his fifth bankruptcy as early as September 2020.