The Pathology of Credit Breakdown
Michael Trebilcock* assisted by Arthur Shulman**
The authors were assisted in their research for this article by Mr Robert
Cooper, formerly Director of the Pte St Charles Community Legal Services
Clinic, Bradley Nemetz, Philip Rosen, Alan Rosenzveig, Leila Malouf, Myron
Zeitz, Andrea Mecs, and Michel Cloutier. Financial assistance was provided by
the Donner Canadian Foundation and the Wainwright Fund, whose generosity
the authors gratefully acknowledge.
I. INTRODUCTION: PERSPECTIVES ON THE ECONOMIC AND
SOCIAL ROLE OF CONSUMER CREDIT
Social attitudes to the virtues of credit have changed mar-
kedly over recent years. There was a time when a consumer
who borrowed to buy goods was widely regarded with disdain as
one whose interests society should not be too solicitous to protect.
Either he was a pauper, and thus a social failure, or he was attempt-
ing to live beyond his means, in which case the lack of discipline
would prove destructive of his character. To believers in the Pro-
testant Ethic, solid citizens worked hard, saved up, and then, as an
invariable principle, paid cash. This cynicism towards the wisdom
of using credit is well-reflected in the oft-quoted observation of an
English County Court Judge that a great part of his time on the
Bench had been concerned with “people who are persuaded by
persons they do not know to enter into contracts they do not
understand to purchase goods they do not want with money they
have not got”.’
However, reflecting the dramatic change in social attitudes,
consumer credit outstanding in Canada has risen from $1 billion in
1949 ($77 per capita) to $19 billion in 1975 ($825 per capita)Y Today
* Professor, University of Toronto Faculty of Law.
** Advocate, Bar of the Province of Quebec.
‘Lord Greene, quoted by Lord Evershed, The Practical and Academic
Characteristics of English Law (1956), 40.
2 See e.g., Canadian Consumer Credit Fact Book (1974), Tables 1 and 41 and
Statistics Canada (1975).
McGILL LAW JOURNAL
[Vol. 22
a majority of families sooner or later have occasion to use consumer
creditO Why do these families borrow?
1. Benefits4
In some cases, measurable economic benefits can be obtained
through the use of consumer credit in the same way that businesses
can, in particular cases, maximize profits by borrowing. For example,
to buy a television set on credit and reduce outside entertainment
expenditures may produce a net saving for a family. Similarly, a
washing machine bought on credit may eliminate outside laundromat
charges.
There are administrative conveniences to the use of credit. This
applies particularly to credit card types of credit which may obviate
the necessity of carrying around large amounts of cash, avoid the
possibility of being “caught short” without ready access to a bank,
and provide documentary records of transactions.
Using credit may also provide a family with a form of budgetary
constraint which will ensure that the family regularly devotes a
proportion of its budget to acquiring reasonably enduring assets. If
consumers were required to save up and pay cash for all items pur-
chased, many would find the austerity required too much for them.
Thus, in the case of these consumers, the use of consumer credit
operates as a form of compulsory saving.
The most important advantage of the use of consumer credit
is the least measurable in objective terms: consumer credit enables
a consumer to maximize the satisfactions that he. can obtain from his
available resources.
In the case of business credit, this issue poses few problems.
Satisfaction is measured in terms of monetary profit, and if the use
of credit better maximizes this, clearly its use can be regarded as
justified. Thus, there is an objective criterion against which to
measure marginal satisfaction derived from the use of business
credit. On the other hand, in the case of consumer credit, satisfactions
are often physical and aesthetic and thus almost entirely subjective
and unmeasurable. Will a man derive more satisfaction from buying
a car or appliance for his family now on credit, thus committing
future income, or saving up, doing without for five years and then
buying it for cash?
3 In 1970, 51 percent of all non-farm family units used some form of consumer
credit: Consumer Credit Fact Book, ibid., Table 40.
4 Cf. E. P. Neufeld in J. J. Ziegel and R. E. Olley (eds), Consumer Credit in
Canada (1966), 13.
1976]
THE PATHOLOGY OF CREDIT BREAKDOWN
Studies indicate that the greatest use of credit is made by young
families in the middle income brackets (with rising income expecta-
tions, for the most part) .4a This is what one would expect. By using
consumer credit prudently, consumers are able to level out peaks
in their needs and resources, which otherwise might not coincide. A
young married couple with a family will obviously have the greatest
needs now for accommodation, home appliances, transportation and
educational “investments”. The peak earning capacity of the family
is likely to occur at some later time when the couple has moved to
higher income brackets. Consumer credit thus enables them, per-
fectly rationally, to meet present needs out of future income, and
thus to maximize the benefits which flow from that income:
[I]t would be rational to argue that a consumer should use consumer
credit up to the point where his marginal satisfaction from the goods
and services so acquired is equal to the marginal cost of credit needed
to acquire them within the constraints imposed on him by his income
and net worth. Certainly on an a priori basis it is as easy to visualize a
consumer using too little consumer credit as too much.5
While the question of what is a prudent use of consumer credit is a
difficult one, due to the many subjective factors, it is a central one
to framing regulatory laws in the area. Until one arrives at some
concept of what is a prudent use of credit, it is difficult to frame
legislation along lines that prevent consumer abuses and encourage
greater consumer rationality.
2. Costs
The most notable social cost of the use of consumer credit is
overcommitment. Consumer credit is especially dangerous in this
respect. Because one buys now and pays later, the pleasures of
possession are immediate while the pains of payment are remote, and
a proper balancing of both considerations is often not undertaken.
With the rapidly rising burden of debt, it is argued that the social
damage caused by people taking on commitments they cannot meet
is being gravely compounded. If a consumer defaults in payment
of his debts he is liable to have his wages garnished (and perhaps
as a result lose his job), or his possessions seized in execution, or
be forced into bankruptcy. In any of these circumstances his welfare
and that of his family may be severely impaired. Even if he manages
to meet his commitments and avoid a formal default, it may be at
4a Consumer Credit Fact Book (1970), 24-25; Report of the U.S. National
Commission on Consumer Finance, Consumer Credit in the United States
(1972), 12, 16.
5 Supra, note 4, 10.
418
McGILL LAW JOURNAL
[Vol. 22
the expense of better food, housing or education, and may cause
family division or disintegration:
One wonders, inevitably, about the tensions associated with debt collection
on such a massive scale. The legacy of wants, which are themselves
inspired, are the bills which descend like the winter snow on those who
are buying on the instalment plan. By millions of hearths throughout the
land, it is known that when these harbingers arrive, the repossession
man cannot be far behind. Can the bill collector be the central figure
in the good society?6
While it is impossible to quantify overcommitment the figures
reported in annual reports by the Federal Superintendent of Insur-
ance regularly disclose that 25% of the accounts of Canada’s con-
sumer loan companies are running at least a month or more behind
their repayment schedules. These figures, of course, include mutually
agreed advance reschedulings, but nevertheless they indicate a degree
of marginality amongst a high proportion of borrowers from this
category of consumer credit grantor. However, in the Montreal study
discussed later in this article,60 a nation-wide department store
informed us that 18-20% of their credit accounts were 30 days or
more in arrears, and an oil company credit card department told us
that 33% of their accounts were 30 days past due.
Opposing arguments stress, however, the trifling incidence of
total defaults. Bad debt write-offs in the consumer credit industry
generally average less than 2% of total credit extensions.
The use of consumer credit has strengthened the net worth
position of consumers enormously. “The average net worth [the
difference between total assets and total indebtedness] of all fami-
lies and unattached individuals in the spring of 1969 amounted to
a rise of 70 percent.”1 Using
$14,369 compared to $8,430 in 1964 –
inflation-proof figures, in 1964, 25% of all families and unattached
individuals had debts as great as, or greater than, their total assets.
By 1969, this percentage had fallen to 16%. In 1956, 27% of all
families and unattached individuals held no assets as compared to
4% in 1969.7a
Neither has consumer credit discouraged prudence in main-
taining a steady level of savings. Indeed, personal savings as a ratio
of personal disposable income rose from 4.7% in the early sixties
to 7.4% in 1973.8
6J. K. Galbraith, The Affluent Society 2nd ed. (1969), 172.
6a Infra, p. 420.
lCanadian Consumer Credit Fact Book, supra, note 3, 36-37.
7a Ibid.
8 Ibid., exhibit 33, 34.
1976]
THE PATHOLOGY OF CREDIT BREAKDOWN
The percentage of non-farm families and unattached individuals
using some consumer credit has remained relatively static, increas-
ing slightly from 48.6% in 1956 to 50.8% in 1970,1 perhaps suggesting,
as Neufeld hypothesizes, that some consumers are in fact under-
utilizing consumer credit (although the figures may also suggest
that an increasing number of existing users are over-utilizing
credit).
In addition many defaults are explained by quite unforeseeable
contingencies such as lengthy sickness or unemployment of the con-
sumer which in no way reflect laxness on the part of the credit
grantor in extending the credit. For credit grantors to eliminate all
possibility of defaults would involve depriving a number of poten-
tially good credit risks of credit. As the use of credit becomes more
widespread consumers will educate themselves as to its possibilities
and limitations, just as commercial borrowers have done. In other
words, they too will become “professional” borrowers.
A wider criticism of the phenomenon of consumer credit sees
private enterprise promoting the consumption ethic and subverting
the sovereignty of the consumer over his own wants which in
classic free market economics is essential to the proper operation
of a competitive market-place. Galbraith in The Affluent Society”
and The New Industrial State” argues that most consumer wants
today are artificially contrived by the process of production itself,
suggestion or by advertising and sales-
either by emulation and
manship. The conventional theory that holds that production must
be maximized so as to cater to existing consumer wants is alleged to
be fallacious once it is shown that the process of production creates
its own wants.
Defenders of the existing consumer market-place argue that
Galbraith attributes far too much influence to advertising. It has not
been demonstrated, so it is argued, that advertising raises the general
level of consumption. Instead, it may simply reflect pre-existent
social tates and values and only divert consumer expenditures from
one product to another. Moreover, even if present consumer wants
are contrived, there is no way of altering this through State inter-
vention without imposing another ethic.12
9 Ibid., table 40, 76.
10 Supra, note 6.
11J.K. Galbraith, The New Industrial State (1967).
12 Cf. M.J. Trebilcock, Consumer Protection in the Affluent Society (1970)
16 McGill L.J. 263.
McGILL LAW JOURNAL
[Vol. 22
Given the diversity of opinion, a fundamental policy issue must
be resolved before regulatory laws in the area of consumer credit
can be drafted: What is the legitimate social function of consumer
credit? A similar question, formulated in terms of an individual
consumer, was posed earlier: When is an individual making a
prudent use of credit? The answer to one is dependent upon the
other. Of course, any evaluation of existing and prospective forms of
regulation of consumer credit implies an examination of the very
basic social issues to which they are a response. 13
In the next section we examine empirically the phenomenon of
credit break-down against the background of the considerations
raised above. Finally, we will present some policy suggestions for
regulating the adverse consequences of wide-scale consumer credit
granting.
I. THE CASUALTIES OF THE CREDIT SYSTEM:
THE 1972 MONTREAL STUDY
1. The methodology
In the summer of 1972, the authors, assisted by several summer
research students, embarked upon an empirical study of a number
of aspects of the credit granting and debt collection process in the
city of Montreal. The focal point of the study involved personal inter-
views, lasting on average between two and three hours, with one
hundred and ten debtors, chosen at random from court records,
who had had their personal effects seized or wages garnished
within the preceding six months. The purpose was to obtain some
picture of the demography of debtors who default: the reasons for
their default, the kind of transactions in respect of which default
most frequently occurs, the kinds of creditors who most frequently
resort to the courts, the course and features of the collection pro-
cess, formal and informal, to which these debtors were subjected,
and knowledge of legal rights and obligations on their part at
different stages of the process. This study (hereinafter referred to as
the Debtor Survey) was supplemented by a statistically broader-
13 We have not attempted in this introduction to examine the aggregate
economic impact of consumer credit on economic growth, economic instability,
and inflation: see P.W. McCracken, J.C.T. Mao and C. Fricke, Consumer Credit
and Public Policy, University of Michigan (1965), and the Report of the Board
of Governors of the U.S. Federal Reserve System, Consumer Instalment
Credit (1957).
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
based analysis of five hundred closed court files, selected at random,
from files held by the Montreal Provincial Court, in which proceed-
ings had been commenced at least two years before our analysis
(hereinafter referred to as the Court File Survey). In both surveys,
debt claims involving business debtors (i.e., corporations, partner-
ships, or sole traders) were eliminated, so that the creditor-debtor
relationship examined was confined to one where the creditor was
either a business or a private plaintiff and the debtor was a non-
business debtor. In addition, major categories of creditors (e.g.,
small loan and sales finance companies, banks, small, medium and
large retailers, utilities and even loan sharks) were the subject of
extensive selected interviews and inhouse observation, sometimes
lasting several days, enabling us to analyze their credit granting
and collection policies.
Finally, intermediaries in the collection process, in particular
collection agents and bailiffs, were the subject of extensive empirical
analysis. In the case of the former, members of the research team
spent a number of days as observers in several collection agencies. In
addition, seven collection agencies were selected at random from the
telephone directory and mock accounts were sent by one member
of the team under a registered business name to an agency to be
collected against another member of the team, and details of the
correspondence and phone calls from each agency were collected.
In the case of bailiffs, we collaborated in two studies being simulta-
neously conducted by the Pointe St Charles Community Legal
Services Clinic 4 and by students from the Sir George Williams
Sociology Department.15 As part of these studies, one of our students
spent several weeks working for a bailiff. Finally, independently,
but during approximately the same period, the Research Group in
Jurimetrics from the University of Montreal Faculty of Law con-
ducted a detailed, empirical analysis of 370 files of debtors under
the Lacombe Law and 201 files ofdebtors in the small debtors’ bank-
ruptcy programme in Montreal.’6 We make comparative reference to
this impressive study throughout this article (hereinafter referred to
as the University of Montreal study). We also from time to time
make comparative references to an unpublished 1973 research study
14 Community Legal Services Inc., Service, Seizure and Sale (1972) (un-
15 Sir George Williams University, (now Concordia University), Sociology
Department, A Study of Accounts Buying and Bailiff Practices in Low-Income
Neighbourhoods of Montreal (1972).
16 C. Masse, E. Mackaay, J. H6rard, Vivre ou Exister?, Universitd de Montrdal
published).
(1974).
McGILL LAW JOURNAL
(Vol. 22
by the Alberta Debtors Assistance Board in which 636 current files
of debtors under Part X of the Bankruptcy Act”‘a were analyzed
(hereinafter referred to as the Alberta study). In order to make
as broad a set of comparisons geographically within Canada as
possible, we also refer briefly to some 1974 demographic data on
debtors with files with the Small Claims Court Referee in Toronto
compiled by the Referee and 1970-71 data in British Columbia of
debtors under Part X of the Bankruptcy Act. 17
2. Which creditors sue?
In our Debtor Survey and Court File Survey respectively, the
categories of creditors invoking formal coercive legal process and
their relative distribution are shown in Table 1.
TABLE 1
Creditors Suing
Debtor Survey (%)
Court File Survey (%)
Banks
Finance Companies
Government Creditors
Credit Card Companies
Retail Credit Sales
Utilities
Professionals (doctors, dentists,
lawyers, hospitals)
Account Buyers
Private Plaintiffs
Others
7.3
10.9
0.9
4.5
14.5
11.8
14.5
1.8
12.7
21.1
100.0
6.9
9.1
1.2
2.6
17.7
12.5
14.9
4.0
9.7
21.4
100.0
The Alberta study revealed a different distribution of debts owing
under Orderly Payment of Debt orders by category of creditors,
shown in Table 2.
16a R.S.C. 1970, c.B-3.
17 G. Gallins, The Operation of Part X of the Bankruptcy Act in British Colum-
bia (1971) 6 U.B.C. L.Rev. 419. The authors are acutely aware of the method-
ological limitations of their own study, particularly the Debtor Survey with
its small sample and elements of self-selection in the interviewing process.
However, debates over the extent of the phenomenon of overcommitment
in Canada, and prescriptions for its cure, have until now been characterized
more by dogma than any information at all.
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
TABLE 2
Amounts owing to:
Banks
Chargex
Credit Unions
Finance Companies
Department Stores
Oil Companies
Collection Agencies
Medical
Income Tax
Personal
Auto
Other
15.89
.86
5.73
38.79
11.79
4.27
1.67
1.36
.88
4.42
1.20
13.14
I00.00
The U.B.C. study showed that 94% of debtors owed money to at least
one finance company, 90% to at least one store, 45% to at least one
bank, 25% to at least one credit union, 20% to at least one pro-
fessional, and 12% to at least one utility.’
Who grants consumer credit and who holds seriously delinquent
debts? In 1973 banks held 50.2% of the consumer credit market
in Canada, finance companies, credit unions and caisses populaires
30.7%, retailers and department stores 11.2% and others 7.9%.1
Several interesting patterns emerge from our tables in this respect.
First, purveyors of retail credit (vendor credit) make much more
frequent use of formal legal processes to collect their debts (about
16% of our cases relative to an 11% share of the credit market) than
purveyors of lender credit (essentially finance companies and banks;
about 20% of our cases relative to an 80% share of the credit
market). Among more specific classes of creditors, professionals,
especially doctors, hospitals and dentists (presumably before med-
icare took hold), appear the toughest collectors. Utilities also
appear to be frequent collectors through the courts.
To try to obtain a closer reading on what “non-loan” credit
transactions lead to default and formal collection activity, in our
Court File Survey we attempted to identify the subject matter of
the transactions in question. The results are shown in Table 3.
18 Ibid., 426.
19 Supra, note 2, exhibit 40.
McGILL LAW JOURNAL
t:Vol. 22
TABLE 3
Credit Cards
Rent
Car Purchases
Household Appliances
T.V., Stereo, Tape Recorders
Furniture
Leisure terms (e.g., boats, snowmobiles, cottages)
Utilities
Clothing
Professional Services
8.9
12.3
10.5
3.5
0.8
5.0
1.1
22.4
10.0
25.5
100.0
The subject matter of loan transactions which were the subject
of court action could not generally be identified from court files but
Table 4 below gives statistics for the “reasons for loans” from a
A. A Major Canadian Consumer Loan Company: Reasons for Loans, 1973
TABLE 4*
Reason
Consolidation of Debt
Refinancing Miscellaneous Debt
Clothing
Fuel
Rent
Medical Expense
Automobile
Tax Service Loan
Cash Voucher
Travel and Vacation
Education
Investment
Repair
Furniture
Taxes
Assisting Relatives
Insurance Premiums
Moving Expense
Mortgage and Interest
Adjust Contracts
Miscellaneous
Unknown
Percent of Total
Number
41.9%
4.2%
2.2%
.1%
.3%
.3%
8.2%
1.0%
.4%
7.9%
.3%
.9%
4.7%
3.3%
.7%
.9%
.6%
.6%
.2%
.9%
15.6%
4.8%
100.0
* These figures are not broken down into delinquent and non-delinquent
loans.
1976]
THE PATHOLOGY OF CREDIT BREAKDOWN
B. A Major Canadian Bank: Reasons for Personal Loans, 1974
Percent of Total
Reason
Vans, Trucks, School Buses, Mobile Homes
Debt Consolidation
Loan Liquidation
Taxes, Real Estate Mortgages, etc.
Travel and Education
Home Improvement, Furnishings
Motor Cars
Purchase of Real Estate
Boats, Airplanes, Snowmobiles
Sundry, Including Refinancing
Number
6.69%
.7.25%
4.05%
2.42%
7.32%
16.45%
30.24%
4.80%
3.78%
17.00%
100.00
nation-wide analysis of the files of the customers of a major Ca-
nadian consumer loan company and a major Canadian bank.
By this data, two common stereotypes about debt delinquency
are challenged:
that finance companies lend money easiest and
collect it hardest (a common view of consumerists) and that most
debtors are dead-beats who get themselves into trouble by impulse
purchases of luxury goods (a common view of business).
3. Who are collected against?
A number of questions in the Debtor Survey were designed to
enable us to compile a profile of debtors in trouble. The Court File
Survey provided useful complementary data. Data from the in-
dependent studies are cited for comparative purposes.
In the Debtor Survey, 54% of the respondents gave French as
their principal language, 28% English, 16% gave both and only 2%
gave some language other than French or English. Somewhat dif-
ferent, and statistically broader-based, linguistic figures emerge
from the University of Montreal study: 89.7% of the debtors in the
two programmes filled in the court forms in French and only 10.3%
in English. The linguistic breakdown for Montreal from the 1971
census figures shows that just over 30% of the population are
English speaking and 70% French speaking, thus indicating a
substantial over-representation of the French speaking population
among debtors in default.20 Eighty-nine percent of the debtors in
the Debtor Survey had spent the first twenty years of their lives
in North America; 11% came from Europe or elsewhere.
20 Supra, note 16, 55.
McGILL LAW JOURNAL
[‘Vol. 22
The Debtor Survey showed that 19.5% of the respondents fell into
the 18-29 years age range, 54.8% in the 30-45 age range, 24.3% in the
46-64 age range, 1.2% in the over 65 age range. Hence, fully 80%
of the sample were 30 years or older. Both the University of
Montreal and Alberta studies of wage earner and small debtor bank-
ruptcy programmes show a higher percentage of debtors in the lower
age ranges. In the University of Montreal study, 37.3% of debtors in
both programmes were younger than 29, 32.1% were in the 30-39 age
range, 18.2% 4049, 9.4% 50-59 and 3% older than 60.21 The Alberta
study of Orderly Payment of Debt orders shows 51.87% of debtors
in the 0-30 year range, 30.17% in the 31-40 range, 13.51% 41-50,
2.8% 51-60, .62% over 60, and .62% unknown.22 A major Canadian
consumer loan company provided us with the following figures for
age of borrower for its Canada-wide personal loan operations for
1973: 0-29 years 40.3%, 30-39 25.6%, 4049 19.3%, 50-59 11.7%, 60
and over 3.1%. A major Canadian bank provided us with their
figures for age of borrower (for 1974) in its personal loan operations
across Canada: 0-29 48.85%, 30-39 24.32%, 4049 16.11%, 50 and over
10.72%.
The Debtor Survey showed that 84.5% of the sample were male,
15.5% female. The Court File Survey showed that 88.4% of de-
fendants were male, 11.6% female. The University of Montreal
showed 83.5% male2 and the Alberta study, 90.88% male.24
In terms of the number of people being wholly supported by the
debtor, the Debtor Survey showed that 21.6% had no dependents,
9.4% had one dependent, 11.3% two dependents, 49% between three
and five dependents, 8.4% more than five dependents. Thus, 57% of
the sample had three or more dependents. The University of
Montreal study showed 25.5% of the debtors with no dependent,
51.9% between one and three dependents, 20.1% four to six de-
pendents and 2.3% more than six dependents.25 The Alberta study
showed 10.39% of debtors with no dependents, 13.67% with one,
19.37% with two, 23.14% with three, 14.81% with four, 9.60% with
five and 9.43% with more than five.0
In the Debtor Survey, 14.1% of the debtors were single, 67.9%
were married, 16% were separated or divorced and 1.8% were living
21Ibid., 47.
22A study by the Alberta Debtors Assistance Board (1973), 30 (unpublished).
23 Supra, note 16, 43.
24 Supra, note 22, 3.
25 Supra, note 16, 58.
26Supra, note 22, 32.
1976]
THE PATHOLOGY OF CREDIT BREAKDOWN
common law. Thus a majority of the debtors were married and a
significant percentage (16%) had experienced marriage break-down.
The University of Montreal study found that 25.5% of debtors under
Lacombe Law27 or in the small debtors bankruptcy programme were
either divorced or separated2 8 While Statistics Canada only publishes
statistics on the number of people divorced as a percentage of the
population and not those separated, the figures for Montreal in 1972
show divorcees as 1.6% of the population contrasted with 8.5%
in
the University of Montreal study. 9 The Alberta study showed that
10.52% of the debtors were either separated or divorced,30 and the
U.B.C. study found that 20% of the debtors were separated or
divorced (compared to a claimed figure of 10% in B.C. generally) ,31
In answer to the question “Are you presently employed?”, 74.7%
of debtors in the Debtor Survey said they were, 25.2% reported that
they were not. The University of Montreal study found that 34.7%
of debtors under the Lacombe Law or in the small debtors bank-
ruptcy programme had no job at the time their files were opened3 2
and 67.6% had experienced some period of unemployment during the
three years that preceded the survey.33 Of those debtors who were
unemployed at the time their files were opened, 67.7% had been
unemployed for periods greater than three months0 The average
rate of unemployment in Montreal in 1972 was about 7%.35 The
Alberta study found that 41.67% of the debtors had experienced some
unemployment during the twelve months prior to the Orderly
Payment of Debts order, 38.79% for periods of greater than one
month. 6 The U.B.C. study found that only 45% of the debtors
granted Orderly Payment of Debts orders were continuously em-
ployed during the twelve months prior to filing. Fifty per cent of
those who were unemployed at the date of filing were unemployed
for a period of more than six months prior to this time.3 7
In terms of usual occupation, 21.4% of respondents in the Debtor
Survey described themselves as business or professional people,
27Arts. 652-59 C.C.P.
28 Supra, note 16, 52.
20 Ibid., 53, quoting Statistiques Canada, Recensement 1971, Bulletin pr6limi-
naire, Catalogue (AB-1), tableau 4.
30 Supra, note 22, 31.
31 Supra, note 17, 424.
3S Supra, note 16, 62.
33Ibid., 61.
a4 Ibid., 64.
35 Ibid., 62.
3 6 Supra, note 22, 31.
87 Supra, note 17, 425.
McGILL LAW JOURNAL
[Vol. 22
16.6% as skilled tradesmen, and 61.9% as unskilled labourers. In the
Court File Survey, in the 110 cases where an occupation for the
defendant appeared in the court documents 17.2% were business
or professional people, 18.1% were skilled tradespeople, and 64.5%
were unskilled labourers. Table 5 of the Alberta study shows the
occupational break-down among Orderly Payment of Debts debtors.
In terms of occupational distribution among people who use
consumer credit generally, a major Canadian consumer loan com-
pany and a major Canadian bank supplied us with the figures in
Table 6.
In terms of residential and job mobility, 29.8% of the respondents
in the Debtor Survey had not changed addresses in the previous five
years, 31.9% had changed addresses once, 28.8% had changed
addresses two or three times, 9.2% had changed addresses four or
more times. Thus, 69.9% of the respondents had moved homes at
least once during the previous five years. Forty-six point five percent
of the respondents had not changed jobs in the previous five years,
17.4% had changed jobs once, 25.5% two or three times, and 10.4 four
or more times. Thus over 53% of the respondents had changed jobs
at least once during the previous five years.
The distribution of the level of educational achievement in the
Debtor Survey showed that 28.5% had elementary school education
only, 31.8% some high school education, 17.5% were high school
graduates, 5.4% were trade school graduates, and 16.4% were
university graduates. Thus, over 60% of the sample had less than
a full high school education. The University of Montreal study found
that 37.2% of debtors in the two programmes had elementary
education only, 45.6% some high school education, and 17.2% some
post-secondary education.”
Figures on the annual family income of debtors in the Debtor
Survey show that 12% earned less than $3,000, 28% $3,000-$5,999,
25% $6,000-$7,499, 21% $7,500-$11,999, 14% $12,000 or more. Thus,
40% of the families earned less than the average income for indivi-
duals in Canada in 1972 ($5,828) and about 80% of the families
less than the average family income ($11,300) O The University of
Montreal study found that 32.7% of debtors in the two programmes
had no income, 4.8% less than $3,000 gross income a year, 20.3%
$3,000-$4,999, 24.4% $5,000-$6,999, 12.6% $7,000-$8,999, 4.8% more
3sSupra, note 16, 56.
39Statistics Canada, Income Distribution by Size in Canada: 1972, Catalogue
13-207, at pp.21, 53.
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
TABLE 5
Skilled Labour
Unskilled Labour
Clerical
Professional
Student
Unemployed
Medical
Managerial
Sales
Armed Forces
Other
Female Clients
6.81%
10.41%
62.06%
3.44%,
10.44%
3.44%
3.44%
Males
18.51%
46.01%
5.19%
3.80%
1.38%
5.70%
2.59%
4.13%
6.05%
2.76%
3.58%
TABLE 6
Consumer Loan Company (1973)
Occupation
Skilled, Semi-Skilled
Unskilled
Service Workers
Sales Persons
Clerks, Kindred Workers
School Teachers
Fed., St, County, City Emp.
Armed Forces
Managers, Officials, Exec.
Proprietors
Farmers
Pensioned, Independent
Miscellaneous
Professionals
Bank (Personal Loans 1974)
Manual
Office Workers
Managers, Foremen
School Teachers & Professional People
Salesmen, etc.
% of Total
73.2
9.2
1.5
1.8
4.3
.5
3.2
.7
2.2
1A
.4
.8
.3
.5
100.0
0/ of Total
46.21
19.20
15.29
8.78
10.52
100.00
McGILL LAW JOURNAL
[‘Vol. 22
than $9,000.40 The Alberta Orderly Payment of Debts study found that
2.10% of debtors had total net family income a year of less than
2,400, 10.51% $2,412-$3,600, 26.37% $3,612-$4,800, 26.69% $4,812-
$6,000, 16.34% $6,012-$7,200, 10.82% $7,212-$8,400, 4.04% $8,412-
$9,600, 3.07% over $9,600. It may be useful to compare these figures
on debtors in default with figures (Table 7) supplied to us by a
major Canadian consumer loan company and bank respectively on
incomes of personal loan customers generally.
The University of Montreal study related the income of debtors
inscribed under the Lacombe Law between June 1972 and December
Canadian Consumer Loan Company (1973)
TABLE 7
Annual Income
$ 2,000 – 3,000
3,000 – 4,000
4,000 – 5,000
5,000 – 6,000
6,000 – 7,000
7,000 – 7,500
7,500 – 8,000
8,000 – 8,500
8,500 – 9,000
9,000 – 9,500
9,500 – 10,000
10,000 – 11,000
11,000 – 12,000
12,000 – 13,000
13,000 – 14,000
14,000 – 15,000
15,000 and Over
Annual Income
Under $5,000
$5,000/$5,999
$6,000/$6,999
$7,000/$7,999
$8,000/$8,999
$9,000 and Over
Canadian Bank (Personal Loans 1974)
40 Supra, note 16, 67.
% of Total
1.6
6.4
12.8
24.8
10.6
8.7
4.8
5.2
3.7
2.4
4.8
4.8
2.5
3.1
1.2
1.0
1.6
100.0
% of Total
5.90
6.79
8.88
10.46
10.96
57.01
100.00
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
1973 to the definition of poverty by the Special Senate Committee
in Poverty in Canada.41 Projections to 1972 and 1973 of the Senate
Committee poverty lines by family size, as calculated in the University
of Montreal study,4 2 are shown in Table 8.
Number of Members
of the Family Unit
1
2
3
4
5
6
7
8
9
10
TABLE 8
Poverty Level
for 1972
$ 2,580
4,270
5,160
5,990
6,850
8,120
8,540
9,400
10,260
11,120
Poverty Level
for 1973
$ 2,740
4,520
5,470
6,340
7,250
8,720
9,140
10,010
10,880
11,750
The relationship between the income of debtors in the programme
and these poverty lines is indicated in Table 9 below, taken from the
University of Montreal study.43
TABLE 9
Number of Members
of the Family Unit
Number of
Participants
Average Situation
Relative to
Poverty Level
1
2
3
4
5
6
7
8
TOTAL
51
(21.7%)
42
(17.8%)
39
(16.6%)
53
(22.5%)
24
(10.2%)
16
(6.8%)
4
(1.7%)
6
(2.5%)
235
(100%)
41 Information Canada (1971), 7.
42 Table 48, supra, note 16, 105.
43 Ibid., 106.
+35%
-17.5%
-32.5%
-30%
-50%
-52%
-67%
-32.5%
-17.5%
McGILL LAW JOURNAL
(Vol. 22
The asset position of debtors was also explored in the Debtor
Survey. Only 35% of the debtors owned their own homes; the other
65% rented homes or apartments. The Alberta Orderly Payment of
Debt study found that 87.42% of the debtors did not own their own
homes.44 The U.B.C. study found that 76% of debtors did not own
their own homes.4 : The Debtor Survey found that 53.6% of the
debtors possessed cars, 62% black and white televisions, 26% colour
televisions and 11% had no television, 56% possessed washers and/
or dryers, 66% refrigerators and/or stoves, 49% stereo sets and/or
tape-recorders, 60% major furniture items such as living-room or
dining room suites, 17% leisure goods such as a vacation cottage,
boat or snowmobile. Thirty-six percent reported that they had some
savings (including insurance); the remaining 64% said they had no
savings at all.
In terms of outstanding credit commitments, 16.6% of the
debtors in the Debtor Survey reported total debts in the range
0-$499, 8.9% in the range $500-$999, 21.7% in the range $1,000-$1,999,
15.3% in the range $2,000-$3,499, and 37.1% reported debts in excess
of $3,500. Thus, over half the respondents had debts in excess of
$2,000. The level of overcommitment becomes progressively more
serious in the case of debtors under Lacombe Law or in the small
debtors bankruptcy programme. Table 10 shows the
levels of
indebtedness found by the University of Montreal study.40
Debt/Programme
Lacombe Law Bankruptcy
Total
TABLE 10
Less than
$3,000
$3,000
to
$9,000
More than
$9,000
TOTAL
(40.4%)
140
171
(49.4%)
35
(10.1%)
346
(63.3%)
32
(16.0%)
139
(69.5%)
29
(14.5%)
200
(36.7%)
(31.5%)
172
310
(56.7%)
64
(11.7%)
546
(100.0%)
The average debt of Lacombe Law debtors was $4,658, and of small
debtor bankruptcy debtors, $6,265.17
44 Supra, note 22, 4.
4″ Supra, note 17, 425.
46 Supra, note 16, 70.
47 Ibid., 70.
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
The levels of debt, at the time of making Orderly Payment of
Debts orders, found by the Alberta Study are shown in Table 11.48
TABLE 11
Less than $1,000
$1,001 –
$1,500
$1,501 –
$2,000
$2,500
$2,001 –
$2,501 –
$3,000
$3,001 –
$3,500
$4,000
$3,501 –
$4,500
$4,001 –
$4,501 –
$5,000
$5,001 –
$5,500
.31%
2.99%
5.35%
7.87%
7.55%
11.33%
-11.81%
8.02%
6.92%
7.08%
At the order date, three out of every four debtors in the Alberta
study were therefore more than $3,000 in debt, with more debtors
being represented in the $3,000-$4,000 category than any other.
The Small Claims Court Referee in Toronto reports that for the
year 1974 the average debt commitment per debtor interviewed was
$5,840′ This figure is closely in line with that reported by the
Credit Counselling Service of Metropolitan Toronto for 1974. The
U.B.C. study found that approximately two-thirds of the debtors
under Part X in 1970-71 had debts in excess of $3,000.50
Figures from the Debtor Survey on the size of the particular debt
on which garnishment or seizure proceedings had been taken show
that 28.8% of the debts fell in the range $0-$99, 24% $100-$249,
27.8% $250-$749, 11.5% $750-$1,499, and 7.6% of the debts were in
excess of $1,500. The Court File analysis of the same question showed
that 32% of the debts fell into the $0-$99 range, 26.8% $100-$249,
25.8% $250-$749, 9% $750-$1,499, 6.2% were in excess of $1,500.
As to the efficiency of shopping decisions made by the respon-
dents, where the debt being enforced was for merchandise, 27.5%
of the debtors in the Debtor Survey said that they did not intend to
buy the item in question before going into the store and did not
know the price of the item at other stores. A further 20% intended
to buy the item before going into the store but did not know the
price at other stores. 52.5% claimed that they intended to buy the
item before going into the store and knew the price at other stores.
Thus, almost half the sample displayed perhaps some element of im-
48 Supra, note 22, 39.
49Annual Report, Ministry of the Attorney-General, Ontario (1974).
50 Supra, note 17, 425-426.
McGILL LAW JOURNAL
[Vol. 22
pulsiveness and certainly a lack of concern about comparative shop-
ping.
As to the creation of the debt for the item in question, 78.8%
said that the seller did not initiate the idea of buying the goods on
credit. Nine percent said that the seller did and suggested that they
obtain credit from him or her. Twelve point one percent said that
the seller suggested the use of credit but recommended that they
obtain it from a third-party source.
Respondents were also asked what part of the credit terms were
they most interested in at the time they incurred the debt. Seventy-
four point one percent said “just getting the loan, goods or services”.
Twenty-two point four percent said the amount of the monthly
instalments. Only 3.4% said that they were interested in the amount
or rate of interest. Half the respondents said that at the time of the
interview they knew what rate of interest they were paying. The
other half could give no indication. As might be expected, this state
of knowledge directly correlates with level of education. Only 40%
of the respondents with less than a full high-school education claim-
ed to know the rate of interest they were paying. In the case of res-
pondents who had graduated from high-school, trade school or uni-
versity, 70% claimed to know the rate. However, in terms of com-
parative shopping, we found a remarkedly high level of awareness
among debtors whom we interviewed of which finance companies
were the “easiest” lenders. Many debtors had a hierarchy of finance
companies in their minds and if turned down at one would know
which company next to try. This information seemed accurate
because the same “easy” lenders were named in many interviews.
Once a debtor’s “regular” finance company found out about a new
loan with another company, it would often reverse its earlier decision
and pay out the loan in order to keep the debtor’s business.
These figures suggest both a serious lack of concern about the
Importance of shopping around for the most favourable credit terms,
and perhaps even more seriously, a disregard for the impact of the
credit commitment on the family’s monthly budget.
As to the debtor’s reasons for default, 61.2% named financial
difficulties resulting from simple inability to pay. Six percent con-
nected their default directly to a failure by the seller or lender to
live up to the agreement, e.g., by supplying defective merchandise.
Seventeen and’a half percent said that they had defaulted either
because they were unable to locate the creditor or more usually
because they did not think that they owed any money. Some percent-
age of those cases presumably involved a degree of fault on the part
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
of the creditor through billing misunderstandings, etc. Fifteen and
a half percent appeared to be wilful defaulters, who simply said they
were unwilling, although able, to pay. An example of the latter
category we encountered in our Debtor Survey was a single man
aged 26, heavily in debt, who said that whenever he became des-
pondent he would take a sick leave from work, perhaps obtain a loan
and buy a car and take off on a vacation, running up, in one case,
$900 in gas bills. He had no dependents, no assets, and no in-
tention of paying any of his debts. Another example was a young
man aged 22, writing advertising copy for a radio station, who had
run up large bills for telephone, gas and hydro services, with no
intention of paying for them. He changed addresses regularly in
order to keep ahead of his creditors. The only explanation he could
give for his actions was that he wanted “to –
up the system”.
As to when default first occurred in payment of the debt, 29.4%
said they first fell behind within one month of incurring the debt,
16.6% between one and three months, 24.3% between four and eight
months, 16.6% between nine and eighteen months and 12.8% after
nineteen months or more.
If it were possible to piece together a single stereotype of the
debtor financially distressed enough to be involved in court pro-
cesses of some kind, it would be a male debtor, probably between
25 and 45, married, with three dependents, with an annual income
(in 1972 figures) of between $5,000-$6,000, with debts between $2,000
and $3,000, having a level of education of high-school or less, an
unskilled labourer vulnerable to abnormally high employment in-
security and, to a lesser extent, marital break-down.
4. The course of the collection process
a) Informal collection
Interviews with respondents in the Debtor Survey revealed that
in 26% of cases the debtor claimed to have contacted the creditor
about payment problems before default occurred. In 42.4% of
cases the first contact with the creditor about payment problems
came after default. In 12% of cases, there was contact with the
creditor before and after the default. In the remaining 19.5% of
cases, debtors claimed that legal action was the creditor’s first res-
ponse to the default. In cases where contact occurred, a rescheduling
or variation of the term of repayment occurred in 32.8% of the
cases. The time elapsing between the first contact by the creditor
and commencement of legal action was estimated by the respondents
to be between 0-2 weeks in 14.2% of cases, 2 weeks –
2 months in
McGILL LAW JOURNAL
[Vol. 22
6 months in 25.7% cases, 6 months –
1 year
14.2% of cases, 2 –
in 20% of cases, and over 1 year in 25.7% of cases. An independent
survey carried out by Arthur Shulman in his law firm showed that
the payment response rate to lawyers’ letters threatening suit (mise-
en-demeure) was of the order of 33% (although rates varied by class
of account). We found consumer loan companies surprisingly lenient
in their treatment of defaults. Often a default would lead to another
loan, which would be consolidated with the first and loans would be
constantly stacked one on top of the other. Even where all payments
had ceased, we encountered cases where months had elapsed without
any action by the finance company. Whether this permissiveness is
ultimately in the debtor’s interests may be arguable.
Ninety-five percent of the debtors said that the first contact from
the creditor was a polite reminder. In the remaining 5 % of cases the
debtor was requested to visit the creditor’s office. Eighty-four and
a half percent of the debtors said that the last contact from the
creditor was a polite reminder, 11.6% said that they were requested
to come to the creditor’s office, and only 3.9% reported insulting
letters or telephone calls. No debtors reported that creditors had
threatened to contact, or actually contacted, friends, relatives or
the employer of the debtor. Twenty-eight point three percent of
debtors reported no or only one contact by the creditor before
legal action was commenced. A further 59.4%, who were contacted
more than once, said they were never contacted more frequently
than monthly. Five point four percent said that during the intervals
of most frequent contact, they were contacted about every two weeks,
5.4% said weekly and 1.3% said more frequently than weekly.
One or two additional observations might usefully be made here
from our analysis of selected creditors’ credit granting and collec-
tion procedures. Use of credit rating bureaux for information on a
consumer before the granting of credit seems to be general among
banks and finance companies, large department stores offering
vendor credit and credit card companies. Utilities, fuel oil companies
and smaller retailers use it much less frequently. However, com-
plaints we heard from a number of creditors related to the refusal
of many banks to supply personal loan or credit card status in-
formation on a customer either to them directly or even indirectly
through credit rating bureaux.
Security over goods apparently assumes considerable significance
not only in itself, but through the threat of repossession, in substan-
tially reducing delinquency levels. For example, sales acceptance
companies financing automobiles on conditional sales contracts
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
reported remarkably low levels of delinquency relative to every other
class of creditor. A surprising discovery we made, given the widely
divergent credit granting and collection policies that emerged from
our study, was how few creditors could supply us with any useful
quantitative measure of the effectiveness of each of the various
collection steps pursued. This suggests that hit-or-miss approaches to
collection that may have served in the past have not yet, in many
cases, been adapted to cope with the phenomenon of wide-scale
use of consumer credit. Resulting inefficiencies are presumably
ultimately a cost to consumers. In fairness, we did note that a number
of the large credit grantors had recently both centralized and com-
puterized their collection operations to provide almost constant
monitoring of the aging of accounts, internal reclassification of
customers’ credit ratings for collection purposes, credit ceiling
violations etc. Undoubtedly small credit grantors will increasingly be
at a comparative disadvantage as modern management techniques,
justified largely by scale, are adopted by larger credit grantors in
their collection departments.
A collection agency had subsequently taken over the debt in
24.6% of the cases in the Debtor Survey.” Of these, 21.4% said that
the terms of repayment were varied as a result. All debtors contacted
by a collection agency said that the first contact was a polite re-
minder. Sixty-four point seven percent said that the last contact
from the agency was a polite reminder, 17.6% said that they were
requested to visit the agency’s office, 11.7% said they received in-
sulting letters or phone calls, 5.8% reported that the agency threat-
ened to contact, or actually contacted, the debtor’s employer. Thirty-
six point eight percent said they were contacted only once by the
agency, a further 42% said that the most frequent intervals of
contact were monthly or longer, 15.7% said that they were contacted
about every two weeks, 5.2% said they were contacted more often
than weekly.
While debtors in our survey who were contacted by collection
agencies are a very small sample, the figures do not suggest per-
vasively abusive conduct by collection agencies, at least as per-
ceived by the debtors themselves, or contact so frequent as to amount
to a form of harassment. This impression was generally confirmed
51There appear to be about 60 to 80 collection agencies in Quebec. The
standard terms of doing business are to charge a percentage of money re-
covered, often 331/3%, although rates vary by class of account. Agencies reported
to us recovery rates of between 30% and 60% depending on the class of
account handled.
McGILL LAW JOURNAL
[Vol. 22
by our independent investigations of collection agencies. Isolated
cases were uncovered of the use of simulated court forms, the use
of form letters from “outside” legal firms, which had obviously been
signed and sold by lawyers in blank (and in bulk), agents masquerad-
ing as representatives of government agencies such as the Unem-
ployment Insurance Commission in order to obtain access to, or
information from, a debtor. In one case a one-man collection agency
for a doctor phoned at two-hour intervals throughout the day
and night although it later transpired that the $20 bill was that
of another patient as the consumer had insisted throughout. Another
fairly prevalent practice we encountered, which seems susceptible
of abuse because of conflict of interest, is the arranging of loans by
collection agents from finance companies for defaulting debtors.
Although collection agencies were not involved, several related
practices are worth mention. Some debtors had been contacted,
following a garnishment or execution, by small finance companies
and money-lenders offering consolidation loans at high interest
rates. Pro rate firms offering to take instalments from the debtor
and arrange a pro rate agreement with his creditors for a subs-
tantial fee often disappeared with the debtor’s initial payment
and did nothing. However, larger collection agencies today appear
to see their task as involving psychological strategies, abuses of
which are harder to isolate. We reproduce (without comment) some
passages from a Montreal collection agency’s instruction handbook
to its staff:
a) Nationalit6:
Chaque nationalit6 h 75% poss~de les m~mes penchants. II ne faudrait
quand m~me pas appliquer cette r~gle dans tous les cas, car il y a tou-
jours exception. Prenons pour commencer les -canadiens-frangais et an-
glais. Pour ce qui est du canadien-frangais, en g~n6ral il est plus agressif
que l’anglais. Quand nous disons agressif, ne pensons pas qu’il est meil-
leur ou rdussit mieux dans les affaires que l’anglais. I1 est tout simple-
ment plus explosif da h 1’6touffement de sa race depuis quelques annes. Au-
jourd’hui il se rdveille et donne bouchdes doubles pour rattraper le
temps si prdcieux ddjh perdu. Donc, lors de nos entretiens t616phoniques
il faut toujours chercher A ne pas augmenter la tension ddjh existante. II
faut, au contraire, le traiter en 6gal, monter et descendre avec lui, ne lui
dormant jamais l’impression que vous voulez l’dcraser.
… L’Anglais est une personne d6jh tr~s froide h la base. Ne cherchez pas
h le rdchauffer, vous allez finir geler avec lui. Laissez-le vous apprdcier
et il se rdchauffera par lui-m~me. I1 souffre g6n6ralement d’un com-
plexe de supdrioritd mais ils ne sont pas les seuls. La meilleure fa-
gon de transiger avec eux est de vous montrer toujours h la hau-
teur de la situation car ils se pensent de tr~s grands hommes d’af-
faires. Ne vous laissez jamais intimider par leur langage car ils vont
se servir de la bonne vieille tactique et b votre insu se hisser au plus haut
sommet.
1976]
THE PATHOLOGY OF CREDIT BREAKDOWN
… L’isra4lite (juif). Comme tout le monde le sait, cette race a subi les
pires injustices, injures, degradations physiques et morales que les horn-
mes ont pu connaitre h travers des ages.
… Quand vous transigez avec eux, ils sont durs, mesquins et vont user
de toutes les strat6gies possibles pour sauver quelques sous. Mais, par
contre, ce sont des hommes d’affaires. Il faudra user vous aussi de toute
votre arsenal en m6me temps.
b) Crainte:
Ceci est le plus gros point psychologique du groupe. Nous savons que
g6n6ralement l’6tre humain est craintif. Non pas par anormalit6 mais par-
ce que la crainte fait partie de notre syst~me.
… Pour obtenir un certain respect vis-h-vis votre ddbiteur, il faut tou-
jours crder et maintenir un climat de crainte. Gdndralement, les gens ne
peuvent pas vivre normalement sous un climat d’insdcuritd. La meilleure
faron de crder ce climat, est de ne jamais d6voiler compltement ce qu’il
adviendra si telle ou telle chose n’est pas respectde.
… Le climat de crainte est un facteur que le collecteur doit maintenir et
soutenir continuellement car il est la base de son succ~s.
b) Formal collection procedures
i) General
Fifty per cent of the debtors in the Debtor Survey reported that
they were the subject of a seizure against their moveables, 42.5%
were the subject of a wage garnishment and 7.5% were, or had been,
the subject of both in respect of the debt in question. These figures
on the incidence of seizure of moveables and wage garnishment sur-
prised us. We expected a much higher ratio of wage garnishment,
consistent with patterns in other jurisdictions. Despite rather con-
tradictory figures that emerged from our Court File Survey, figures
supplied to us by Court officials for the Provincial Court for the
Judicial District of Montreal (jurisdiction in claims up to $3,000)
appear to confirm the pattern that emerged from the Debtor Survey.
In 1974, there were 6,705 writs of execution taken against moveable
property (58%), 54 against immoveable property (.5%), and 4,751
post-judgment garnishments (41.5%). This heavy reliance on execu-
tions against moveables in Montreal would seem partly explicable on
the basis of the relatively high garnishment exemption and relatively
low exemption from seizure of moveables.5 2 In addition, rules in
the Quebec Code of Civil Procedure severely circumscribe the rights
of a secured creditor when goods are executed against by an un-
52 Arts.552 and 553 C.C.P.
McGILL LAW JOURNAL
[Vol. 22
secured creditor of the debtor. 53 The rules relating to the terms of a
sale under execution in Quebec are very permissive.”‘ The Court File
Survey indicated that enforcement proceedings of some kind on the
judgment followed judgment in 95.4% of cases. In 30% of wage
garnishments and seizures, the creditor filed a main-levde lifting
the execution, presumably because he had been paid or come to an
accommodation with the debtor, or because the execution had been
invalidly taken in the first instance.
Of the debtors in the Debtor Survey, 78% said that they received
a summons, 21% said they did not, and one person did not know.
These figures are open to several interpretations. Given that service
is almost invariably personal service by a bailiff, the figures may
suggest a significant number of cases of “sewer” service by bailiffs.
Another interpretation is that a number of debtors did not recognize
the summons for what it was. Of those debtors who acknowledged
receiving a summons, 11% said they did not bother reading it, 12%
said that they read it but did not understand it, and 77% said that
they both read and understood it.
Of the debtors receiving a summons, 31% responded by doing
nothing, 43% by contacting the creditor or his agent, 15.5% by taking
the matter to their lawyer, 7.8% by filing an appearance, and 2.6%
by contesting the action. We attempted to verify some of these
patterns from our Court File Survey. In 91% of cases, the debtor
did not file an appearance (i.e., preserve the right to file a defense),
in 3% he filed a personal appearance, and in 6% of cases he filed
an appearance through his lawyer. In 98% of cases, the debtor did
not plead (i.e., file a defense), in 0.8% of cases he pleaded personally,
and in 1.2% of cases he pleaded through his lawyer. Thus, in only
about 2% of all cases (about 9 out of 470) did the debtor actively
involve himself in the legal proceedings as to merits. It will be
recalled that only about 6% of the debtors interviewed in the Debtor
Survey gave as a reason for default any direct breach of performance
by the seller or creditor although a further 17.5% said they could not
locate the creditor or they did not think that they owed any money.
It may be inferred that there are not a large number of meritorious
defenses left unlitigated, although, of course, it is unknown how
many debtors may have had a defense to the debt claim if properly
advised. For example, about 10% of cases in the Debtor Survey
involved bait and switch sales of carpets, door-to-door sales of
magazine subscriptions and encyclopedias, or health spa contracts.
MArts.604 and 612 C.C.P.
54 Art.610 C.C.P.
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
ji) Seizure of goods
Of the debtors in the Debtor Survey who had had goods seized
under execution, 50% said that the bailiff effecting the service had
demanded payment at the time of seizure and 50% said he had not.
At the time of seizure, 61.6% of the debtors seized had no know-
ledge of their rights, 10.2% knew they had the right to withdraw
$1,000 of goods or necessities, 2.5% knew they had the right to choose
the exempt goods, 2.5% knew they had a right to appoint a solvent
guardian to guarantee production of the goods on the date of sale,
and 23 % were aware of more than one of these rights. In 93% of
all seizure cases, the bailiff provided the debtor with no information
as to his rights. In 56.5% of cases, debtors claimed that the bailiff
seized goods belonging to someone else. One reason why this figure
is so high (apart from secured creditors’ claims) is that 45.5% of
the married debtors in the Debtor Survey claimed to have marriage
contracts. In 95% of cases the bailiff chose the $1,000 worth of goods
to be exempt from seizure. In 93% of cases the debtor made no at-
tempt to appoint a solvent guardian and in 7% of the cases an
attempt was made but one could not be found. In 44% of the cases,
the goods
the seized goods were removed from the home, in 51%
were left in the home, and in 5% some seized goods were removed
and some left. In 22% of cases, seizure papers were left and were
signed by the debtor. In 44% of cases seizure papers were left but the
debtor refused to sign them and in 34% of cases debtors claimed that
the bailiff left no seizure papers (although he is required to do so).
From our impression of bailiffs’ sales notices and the obser-
vations of the member of the research team who worked with a bailiff
for part of the summer, most sales of non-business debtors are held
at their place of residence. This avoids both moving the goods and,
by virtue of the potential humiliation, increases the pressure on the
debtor to settle. In the seizures that had reached a determination
at the time of interview, 79 % resulted in the debtor settling the claim
to avoid sale. Only in the remaining 21% of cases did seizure proceed
to sale. We believe even these figures probably over-state the per-
centage of seizures that generally proceed to sale. A member of the
research team telephoned bailiffs’ offices on the morning of 36
separate advertised sales and not one sale was proceeding. There
appear to be several explanations for this. Seizure is used as a
form of pressure on the debtor and appears to prove highly effective
in this respect. Oppositions to seizure, either by the debtor or by
a third party, prevent many sales, perhaps as many as 50%, according
to the Court File Survey. Thirdly, the uncertain timing and dispersed
McGILL LAW JOURNAL
[Vol. 22
locations of most of the sales hopelessly undermine the efficiency of
the procedure as a form of liquidating unpaid debt claims. This
latter inference was supported by our observations of a number of
bailiffs’ sales. There were rarely more than six people present and
often only two or three. Often the bailiff would “knock down” goods
to members of his own staff. The other buyers were almost invariably
second-hand dealers. Because the effectiveness of a seizure lies
primarily in the threat it represents, in a sense the more “value
destruction” it causes the more effective it is as a collection weapon.”,
We reproduce below the minutes of sale from an actual sale:
Debt: $1,438.54
Creditor: national credit card company
Debtor: Doctor
Number of Buyers at Sale: 1
(1) 1 complete rosewood wall hanging unit, consiting of
liquor bar, custom cabinet for stereo and records, six
drawer cabinet and serving tray, further cabinet with
drop-down desk, 8 rosewood scatter shelves, size of unit
15′ long, floor to ceiling, (new, still in crates)
Estimated value $3,000
Sold:
$100.00
(2) 4 seater leather chesterfield and matching leather arm-
chair (new)
Estimated value $4,000
(3) 2 rosewood end tables with glass tops (new)
Estimated value $600
(4) 2 leather pouffes
Estimated value $200
Sold:
$275.00
Sold: $ 10.00
Sold: $ 2.00
Sold: $ 15.00
Sold: $ 10.00
(5) 1 1974 Smith Corona portable typewriter and carrying
case
(6) 1 decorator lamp for wall unit (chrome, glass and rose-
wood)
Estimated value $285
(7) 1 20″ Black and White Admiral portable T.V. (year old)
(1974)
Sold: $ 26.00
Of the debtors seized, 64.5% had never been seized before, 11%
had been seized once before, 9o had been seized twice before, and
15.5% had been seized three or more times previously. The Court
File Survey shows that 9% of debtors were seized twice successively
for the same debt. Thus for a significant portion of the debtors
seized (35%), seizure had become almost a way of life.
The Court File Survey, Table 12, reveals the categories of creditors
which seize most often.
5Cf. A.A. Leff, Injury, Ignorance and Spite –
Collection (1970) 80 YaleLJ. 1, 13.
The Dynamics of Coercive
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
TABLE 12
Seizing Creditors
Banks
Finance Companies
Government
Credit Card Companies
Retail Creditors
Utilities
Professionals
Account Buyers
Private Creditors
Others
TABLE 13
Seizing Creditors
Government:
Ministry of Revenue (Prov.)
Minimum Wage Commission
Accident Insurance Commission
Federal Government
Municipalities
Other Government
Financial Institutions:
Banks
Caisses Populaires
Finance Companies
Collection Agencies
Real Estate Companies
Investment Trusts
Credit Unions
Wholesalers
Construction Companies
Retail Goods & Services:
Doctors
Fuel Companies
Utilities
Auto Dealers
Gas & Repair (Auto)
Car Rentals
Department Stores
Food Stores
Other Retail Goods & Services:
Numbers
88
19
19
17
54
1
(Sub-total: 198)
65
29
21
34
10
8
8
(Sub-total: 175)
113
31
102
67
20
39
46
13
70
35
179
(Sub-total: 571)
2.8%
4.2%
2.8%
1.4%
18.1%
5.6%
18.1%
2.8%
13.9%
30.3%
100.0%
5.9
2.6
1.9
3.1
0.9
0.7
0.7
(16)
10.3
2.8
9.3
6.1
1.8
3.5
4.2
1.1
6A
3.2
16A
(52.4)
McGILL LAW JOURNAL
[Vol. 22
Interesting comparative figures are afforded by the Sir George
Williams study of bailiff sales. In this study, every second Saturday’s
statutory advertisements of bailiffs’ sales each month from July 1970
to June 1971 were analyzed. Of the 2,320 seizure and sale notices
analyzed, the precise nature of the plaintiff and the general nature
of the credit relationship could be identified in 1,088 cases. Of the
cases relating to seizures of business, most of the plaintiffs were
either government or wholesalers. Government departments or
agencies most frequently seizing businesses were the Accident In-
surance Commission, the Minimum Wage Commission and the
Ministry of Revenue (126 out of 198). The balance of government
seizures were mostly municipal seizures for unpaid property taxes.
Wholesalers’ seizures related exclusively to business debtors. A
minority of the 31 seizures carried out by the construction industry
were against businesses and an even smaller proportion of bank
seizures related to business debts. Identifiable creditors seizing
moveables, from the Sir George Williams study, are shown
in
Table 13.
Table 14 shows categories of debtors seized by occupation from
the Debtor Survey and the Court File Survey.
TABLE 14
Debtors Seized by Occupation
Occupation:
Business or Professional
Skilled Tradespeople
Unskilled Labour
Debtor Survey
Court File Survey
29%
21%
50%
100
25 %
16.7%
58.3%
100.0
And Table 15 shows categories of debtors seized by income from the
Debtor Survey:
TABLE 15
Debtors Seized by Income
Under $3,000
$3,000 – $5,999
$6,000 – $7,499
$7,500 -$11,999
$12,000 or more
36.3%
18.2
18.2
15.2
12.1
100.0
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
It must be noted that while bailiffs are court officers in the
sense that they effect service of court documents and execute orders
of the court, in fact, in Montreal they operate in firms as independent
entrepreneurs who charge creditors on a piecework basis, in ac-
cordance with court tariffs. They are normally required to be mem-
bers of the Bailiffs Corporation of Montreal, which has self-
regulating powers over admission and discipline. In 1972, there
were about 75 member-bailiffs in the corporation. The corporation
does not exercise rigorous disciplinary action. The Pointe St Charles
study reports that as of 1972, a bailiff was last suspended for mis-
conduct in 1952.1 Fines do not seem to enjoy much greater popu-
larity. The Pointe St Charles study reports that in one case
where a bailiff attempted to conduct a seizure, he was refused
entry by the wife of the debtor who told him he could only make
the seizure over her dead body. He replied that “this can easily be
arranged”. For this, the corporation fined him $300.F7
Other abuses clearly abound: failure to advise debtors of their
statutory rights, contrived mileage charges on service, “sewer” ser-
vice, conflict of interest on sales and routine overseizure. An extreme
example of the latter involved a seizure, against an elderly unem-
ployed janitor on welfare, of an $880 stereo set for non-payment
of the $17 balance of a $32 doctor’s bill. In order to retrieve the
set, the $17 plus $92 in various legal costs had to be paid, together
with an additional $24 for retransportation charges.
iii) Wage garnishment
Debtors in the Debtor Survey whose wages had been garnished
said they were previously notified by the creditor of his intention to
issue a garnishment in 57.5% of cases. In 63% of cases debtors be-
came aware that their wages had been garnished upon service of a
garnishment notice on them. In the remaining 37% they first heard
through their employer. In 74% of cases, debtors claimed that their
employer did not express any opinions as to the garnishment. In 17%
of cases, the employer urged the debtor to settle the debt. In 3%
of cases, the employer threatened to fire the debtor and in 6% of
cases the debtor was actually fired. These latter two figures are
surprisingly low compared to figures reported in other studies 58
and may, in part, be a reflection of the effect of article 650 of the
Quebec Code of Civil Procedure, a unique provision which renders
56 Supra, note 14, 4.
57 Ibid., 5.
58 E.g., a 19% job loss on account of garnishment, D. Caplovitz, Consumers
in Trouble (1974), 238.
McGILL LAW JOURNAL
[Vol. 22
an 6mployer civilly liable, apparently to both debtor and creditor, for
damage suffered as a result of job dismissal on account of garnish-
ment. However, in response to the question whether they were still
working for the same employer, 76% replied affirmatively, 24%
negatively. Of those who were not, 85% either left or were fired
within 4 weeks after the garnishment, which may suggest that the
garnishment did have an effect on either employer or employee in
cases other than those of debtors who were explicitly fired on that
account.
In 35% of all garnishment cases in the Debtor Survey, the debtor
immediately settled the claim and the garnishment was lifted. Thus,
like seizure, garnishment operates as an effective form of pressure
on many debtors, without the necessity of execution although, unlike
seizure, the majority of garnishments do proceed to execution. Of
the debtors who had been garnished, 70% had never been garnished
before, 14% had been garnished once before, 9% had been garnished
2 or 3 times previously, and 7% had been garnished 4 or more times.
The Court File Survey showed that 9% of debtors who were gar-
nished were garnished more than once in respect of the same debt.
As to which categories of creditors garnish most, the Court File
Survey revealed the distribution shown in Table 16.
TABLE 16
Garnishing Creditors
Banks
Finance Companies
Credit Card Companies
Retail Creditors
Utilities
Professionals
Account Buyers
Private Creditors
Others
6.8%
11.6%
4.4%
16.3%
17.9%
13.9%
3.2%
8.4%
17.5%
100.0
As to which categories of debtors are most frequently garnished,
Table 17 shows distribution by occupation both from the Debtor
Survey and the Court File Survey.
TABLE 17
Debtors Garnished by Occupation
Occupation:
Business or Professional
Skilled Tradespeople
Non-skilled Labour
Debtor Survey
Court File Survey
16%
9%
75%
12%
19.4%
68.6%
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
Debtors garnished by income are shown in Table 18 from the
Debtor Survey.
TABLE 18
Debtors Garnished by Income
Income:
Under $3,000
$3,000 – $5,999
$6,000 – $7,499
$7,500 -$11,999
$12,000 and over
0%
27.3%
33.3%
30.3%
9.1%
The different impact of seizure of goods and garnishment on
different categories of debtor by income should be noted from
Tables 15 and 18.
5. General
The impact of direct transaction costs on either party in the
collection process interested us.5 9 The Court File Survey revealed
that in 34.3% of cases, costs on the judgment fell in 0-$49 range,
39% in the $50-$99 range, 24% in the $100-$199 range, 2.5% in the
$200-$299 range, and 0.2% in excess of $300. In cases where costs
were incurred subsequent to judgment 72% fell in the 0-$50 range,
15.9% in the $51-$76 range, 4.7% in $77-$100 range, 4.7% in the
$101-$150 range, and 2.8% over $151. To get an impression of the
size of direct transaction costs in the collection process relative to
the size of the claim out of which these were generated, we correlated
size of the debt with the costs on judgment in Table 19.
Relationship Between Size of Debt and Costs on Judgment
TABLE 19
Size of Debt
0-$24
$25 – $99
$100- $249
$250 – $749
$750 – $1,499
$1,500 and over
0-$49
$50 – 99
Costs on Judgment
$100 -199 $200 -299 $300 & over
89 %
93.8%
8.8%
3.4%
2.4%
4.1%
11 %
6.2%
83 %
55 %
4.9%
4.1%
7 %
39 %
87.8%
66.6%
1 %
2.5%
4.9%
20.8%
4.1%
59 See Leff, supra, note 55.
McGILL LAW JOURNAL
[Vol. 22
As to how both costs on judgment and costs subsequent to judgment
may build up, we reproduce below the details of an actual file:
Debt: $395 personal loan
(1) Writ of summons
Service of writ of summons
Inscription for judgment
Judgment costs (disbursements as above plus lawyer’s fee)
(2) Filing of first garnishment
Service of garnishment
Judgment costs on garnishment (disbursements as above plus
lawyer’s fee)
(3) Second garnishment (on job change)
(4) Third garnishment (on job change)
Total costs:
Total received:
Balance outstanding:
$ 3.00
$ 9.50
$ 5.00
($100.00)
$ 6.00
$ 22.00
(S 38.00)
(S 42.20)
($ 41.40)
$221.60
$303.76
$312.84
To conclude our Debtor Survey, we asked some subjective ques-
tions. Thirty-five and a half percent of the interviewees considered
they had been fairly treated by the creditor in the collection process,
64.5% felt they had not. Thirty-six point three percent felt they had
been fairly dealt with by the creditor’s agents, 63.7% felt they had
not. Forty-six percent felt they had been fairly treated by the Court
and other officials, 54% felt they had not.
Thirty-two point six percent claimed they had heard of the
Lacombe Law, but did not know what their rights were under it.
Twelve point two percent had not heard of it at all. Fifty-five point
two percent claimed that they knew of it and knew that they were
not liable to seizure or garnishment while making payments under
it. Respondents were also asked if they had ever considered going
into personal bankruptcy. Nine point nine percent said that they
could not afford to hire a trustee, 55.5% said that they had never
considered it at all, 5% said they did not want to lose their goods
in the bankruptcy, 14.8% said that they were unwilling to go bank-
rupt because of the stigma attached, and 14.8% said that they were
planning to. Thus, about half the sample had not even considered
the two major statutory programmes open to them in their state
of financial distress, the Lacombe Law and personal bankruptcy.
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
III. POSSIBLE POLICY DIRECTIONS
1. Irrelevant prescriptions
It is perhaps useful at the outset to dispose of certain ill-conceived
policy solutions sometimes proposed for treating problems of over-
commitment.
a) Censoring credit advertising
The Quebec Minister of Financial Institutions, in a speech to an
Interprovincial Conference on Consumer Affairs in Banff, May 15,
1974, announced that he was considering legislation which would
prevent cash credit grantors (e.g., banks and finance companies)
from advertising the purposes for which they were prepared to
extend credit. The object of this exercise would apparently be to stop
banks and finance companies from “over-selling” credit through the
medium of glossy travel or automobile advertisements. Vendor
credit grantors would also be prevented from emphasizing the
availability of credit in advertisements for their merchandise.
It will be obvious from our studies that very few debtors become
involved in serious problems of overcommitment because they are
seduced by credit advertising into buying red Cadillac convertibles
or spending’expensive weekends in the Bahamas. Secondly, even
if this were so, it is difficult to see how this would justify a dis-
criminatory attack on credit grantors’ advertising. If the premise
underlying these proposals is correct, presumably all advertising
encourages over-buying. Placing the issue against this broader
setting, the Galbraithian view of advertising is not so well settled
as to justify legislation.
The one proposal in this area that may be deserving of serious
consideration would require all lender and vendor credit grantors
in all advertisements which refer to the availability of credit to in-
clude the average effective annual interest rate charged to their
customers. In this way, the pleasures and pains of utilizing credit
would be more obvious than at present.
b)
Interest rate ceilings
The practice of prescribing maximum interest rates chargeable
on loans is of respectable antiquity and is reflected in Canada prin-
cipally in the federal Small Loans ActIoa which regulates the level
of interest charges on loans up to $1,500.
59a R.S.C. 1970, c.S-ll.
McGILL LAW JOURNAL
[Vol. 22
As one of the authors, with Professor David Cayne, has elsewhere
pointed out,C depending on market conditions, at best rate ceilings
set above or at the market rate will be irrelevant. At worst, vendor
credit ceilings set below market rates will be unenforceable; excess
credit charges can be buried in the cash price. Similarly lender credit
ceilings will exclude certain risks from the market who, depending
on the elasticity of their demand for credit, may be forced into the
illegal money market. Interest rate ceilings improve credit terms for
virtually no one and many borrowers are actually prejudiced. The
is underscored by
impotence of legislation like the Small Loans Act
the fact that the police estimate that the volume of loan-sharking is
now of the order of $700,000,000 a year in Montreal alone.”‘ Eighty
percent is estimated to involve low-income debtors. Since the enact-
ment of the Act in 1939, there have been no more than about three
dozen prosecutions under it for illegal interest charges throughout
Canada.
A loan-shark whom we interviewed shortly after his return from
prison following (a rare) conviction under the Small Loans Act, gave
us some insights into the nature of this credit-granting operation.
He was a retired factory worker and operated out of a rooming
house in the low-income suburb of Pointe St Charles. At the date of
conviction, he had 500 live files, with loans running from about $30
to $500, but typically being initially in the $50-$100 range. Annual
interest rates on loans under $100 tended to run at close to 500%
a year, over $100 about 250% a year (no doubt reflecting fixed costs
that were the same on smaller loans as larger loans). Over ten years,
he had built up his capital investment from $3,000 to $50,000
in loans that he regarded as collectable. His activities provided him
with full-time employment and he made his services available day
and night, mainly to low-income or unemployed residents of the area.
He took from his returns a very modest subsistence allowance of
about $150 a month. Of his 500 active clients, fewer than 20 were
paying off capital as well as interest.
Provided interest payments were met, he had no concern with
capital repayments. His collection methods were relatively genteel.
He would take I.O.U.’s from debtors for a sum substantially in
excess of the amount advanced, and in the event of default in pay-
ment of interest would have a lawyer enforce payment through the
‘GOD. Cayne and M. Trebilcock, Market Considerations in the Formulation
of Consumer Protection Policy (1973) 23 U.of T. L.”. 396, 411.
OOa Supra, note 59a.
81 Toronto Star, Sept. 25, 1974, A-3.
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
courts (witting and unwitting participants respectively in the loan-
shark’s criminal conduct).
The loan-shark told us the police knew of his existence but had
not bothered him until the charges in question, because they accepted
that he was providing a necessary service to this low-income com-
munity (as he himself vehemently asserted he was doing). While the
judge in sentencing him had described him as “a social plague”, it
is not clear that the facts support this view. First, the police told
us that it was almost impossible to get customers to give evidence as
they regarded, the loan-shark’s services as very satisfactory. Secondly,
even a rudimentary examination of the man’s finances and life
style suggested that the net returns from his business were quite
modest. Thirdly, the annual interest rates in question may well have
been justified both in terms of the high fixed costs involved in
writing and collecting very small loans, and in terms of the high-risk
clientele being served. After all, ten dollars lent for a week at a
charge of one dollar (not even enough to cover writing and collecting
the loan) involves an annual interest rate of 500%.
Loan-sharking exists to meet a real demand and, like Prohibition,
will defy legal regulation. By making certain levels of interest rates
illegal, the costs of credit are actually forced up reflecting reduced
numbers of suppliers and higher risks of doing business. Intelligent
public policy towards loan-sharking should involve taking the market
away – both by an appropriate incomes policy, and by abolition of
fixed rate ceilings to encourage institutional lenders to enter the
small loan, high-risk market at more competitive rates.
The furthest that legislation can reasonably go is to proscribe
“unconscionable” credit transactions, where interest charges bear
no relation to the risk involved, as has been done in article 1040(c)
of the Quebec Civil Code and provincial Unconscionable Transaction
Relief Acts.62 Perhaps this legislation could incorporate rebuttable
statutory presumptions, as exemplified in the U.K. Money Lenders
Act,O providing that rates in excess of stipulated rates on loans of
certain sizes are presumed to be unconscionable unless the contrary
is proved. Legislation attempting to stipulate firm ceilings will al-
ways be too crude and arbitrary to reflect the myriad of risks dealt
with in the credit market.
c) Minimum deposit requirements
The proponents of minimum deposit requirements argue that
62 E.g., R.S.O. 1970, cA72.
63Money Lenders Act, 1900, 63-64 Vict., c.51 (U.K.).
McGILL LAW JOURNAL
[Vol. 22
the provision of the required deposit is some evidence of credit-
worthiness, and provides an inducement to the consumer to protect
his equity in the goods by completing the agreement.
We see some force in the second argument but little in the first.
Whether a person is credit-worthy depends, obviously enough, on his
present and future income, his present and future commitments and
various contingencies such as overtime and sickness. The provision
of a deposit says nothing about these factors and the requirement of
a deposit may well preclude consideration of them.
Minimum deposit requirements have the disadvantage of being
virtually unenforceable. By “jacking-up” trade-in allowances, dealers
can readily make it appear that the required deposit has been
provided and, except in extreme cases, this practice is difficult to
police and prosecute.04
d) A full-scale curtailment of creditors’ remedies
Extreme critics of current credit practices have advocated every-
thing from abolition of wage garnishment to abolition of all formal
creditors’ collection remedies. 5
We believe that this approach, while no doubt well-intentioned,
is seriously misconceived and naive in its disregard of the economic
imperatives operating in the market-place.
One of the authors (with Professor Cayne) has pointed out these
imperatives elsewhere and nothing in the 1972 study has shaken
these views:
Clearly, the exercise by a creditor of his remedies against a debtor for
default are some of the most visible and distressing symptoms of over-
commitment and it is natural enough, as a first instinct, to respond to
these symptoms by advocating their removal. But, as in many other
contexts, the symptoms of a problem are not its cause and to remove
the symptoms does not eliminate the cause but more often than not merely
gives rise to new symptoms. Once again, policy makers must accept the
immutable economic imperative that lenders will only extend credit if
they can do so on a profitable basis; and it is equally axiomatic that
restrictions on remedies will give rise to correspondingly higher interest
rates to the extent that they increase bad debt write-offs. As a result, a
certain number of borrowers, unable to absorb the interest rate exacted,
will be excluded from the market. More significantly, degenerative conse-
614Report to the Standing Committee of State and Commonwealth Attorneys-
General on the Law relating to Consumer Credit and Moneylending, University
of Adelaide Law School (1969), 23-24.
u5 See Cayne and Trebilcock, supra, note 60, 418, 419, 429, 430; see also
T. G. Ipson, Small Claims (1972) 35 M.L.R. 18; and D. St L. Kelly, Debt
Recovery in Australia, Report to Australian Poverty Commission (1976).
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
quences will result where interest ceilings prevent the lender from charging
rates consistent with restrictions legislatively
imposed. In these cir-
cumstances, high-risk consumers whom these lenders would otherwise
have served must withdraw from the market-place (which, admittedly,
some proponents explicitly adopt as their objective), or, alternatively,
enter the illegal money market where informal day and night harassment,
or even the baseball bat, replace the writ of seizure.
Clearly, the extent to which such legislation initiates exclusionary or
degenerative processes will depend upon both the severity of tie restric-
tions imposed and the elasticity or inelasticity of the demand for credit….
Pursuing our assumption of workable competition, market imperfections
will always temper the exclusionary consequences of such rules. For
example, creditors might respond to the elimination or restriction of
deficiency claims and garnishments by relying more heavily on remedies
not contemplated by the legislation. Thus, in Pennsylvania, the attachment
of a debtor’s home became commonplace after that jurisdiction prohibited
garnishments. Other potential responses might include greater reliance
upon threats of execution against a debtor’s personal property as a form
of harassment, third-party guarantees, and credit black-listing.66
2. Proposals for consideration
a) The income problem
Unquestionably, for a very large percentage of debtors surveyed
in our study, a deficiency of income is the major reason for over-
commitment, and only policy responses that address this issue are
likely to have any effect. Rational use of consumer credit is generally
predicated on fairly rapidly rising income expectations where present
needs can be financed out of future income. But for debtors without
those expectations, the use of credit becomes a form of income
supplement which must ultimately erode buying power and create
financial distress.
To discourage the use of credit as a subsistence income supple-
ment requires policies that promote stable economic growth and
employment conditions, that provide adequate educational and em-
ployment opportunities for all social and economic classes and,
ultimately, a guaranteed annual income. Regulation of the debtor-
creditor relationship will not touch the heart of the problem of
overcommitment: insufficient income.”
The remaining suggestions are no more than ancillary to this
central proposition.
Logic of Consumer Credit Reform (1973) 82 Yale L.
461.
6 Supra, note 60, 418-419; for an opposing viewpoint, see GJ. Wallace, The
67 Supra, note 60, 430.
McGILL LAW JOURNAL
[Vol. 22
b)
Improving the exchange of information between debtor and
creditor
Professor Arthur Allen Leff in an important and impressive
economic analysis of the formal debt collection process traces the
transaction costs incurred by both creditor and debtor. He argues
that if each party could be made aware of the costs involved in
continuing the formal collection process, invariably, the parties
would settle the claim as early as possible to avoid mounting costs.
Merchant to merchant debt relations proceed on this basis but rarely
merchant-consumer relations. Leff recommends the presence of an
impartial referee to assist negotiations between the disputants by
supplying trustworthy “information that makes the [generally co-
operative] merchant-merchant collection system feasible”.08 The
referee would inform the debtor of the prospective transaction costs
he faces if he allows the collection process to proceed further; he
would also inform the creditor of the debtor’s true circumstances
to avoid needless transaction costs on the part of the creditor in
collecting against a debtor with limited or no present ability to
pay the full claim.
The intent of this proposal is to induce more cooperative accords
on debt claims and avoid the waste built into the present formal
collection system. Leff’s proposal has much merit and essentially
reflects the thinking underlying the creation of the Debtors’ Assis-
tance Board in Alberta, the Credit Referee’s Office in British Colum-
bia, and the Small Claims Court Referee’s Office in Toronto. These
offices, in addition to offering budget counselling services, will at-
tempt to make pro rate arrangements with a debtor’s creditors,
recommend consolidation and instalment orders to the Court where
a debtor
faces several
judgments,
recommend variations of
garnishment exemptions
to the court, process Part X Orderly
Payment of Debt applications (in Alberta and British Columbia) and
if necessary, counsel personal bankruptcy.
It is clear, for a start, from our Montreal study that these
schemes need to be vigorously advertised if the appalling ignorance
on the part of debtors in distress is to be overcome. This may re-
quire sending out a statutory brochure detailing the agency’s services
with every enforcement process. In order to interdict the process, it
should be possible for a debtor simply to fill in a part of the process
documents invoking the agency’s assistance and suspending execution
pending recommendations to the court by the agency.
6SSupra, note 55, 44; for an extended discussion of Leff’s proposals, see
Symposium (1972) 33 Univ.of Pitts. L.Rev. 667.
1976]
THE PATHOLOGY OF CREDIT BREAKDOWN
This would give the neutral referee more leverage than envisaged
in Leff’s proposal, which ignores the individual creditor’s point of
view. It will rarely, if ever, be worth his while to engage in voluntary
collective decision-making with other creditors when the possibility
is still open of his obtaining a larger payment at the expense of
existing creditors or by inducing the debtor to borrow from a new
creditor to liquidate the first creditor’s debt. Each of the creditors
individually will try to avoid a collective arrangment (a type of
“hold-out” problem, in economic terms).
However, despite the considerable merits of proposals like Leff’s
that would interdict the formal collection process at a relatively
early stage and force negotiations between the parties through a
neutral intermediary, we believe that this, in terms of policy priori-
ties, is looking at the wrong end of the stick.
Leff states earlier in his article that “[ilf information about a
person’s reputation were perfect, there would be no such thing as a
collection problem. The sole ‘collection’ practice would be [the]
precise pricing of the initial transaction. The end-point of every in-
dividual credit transaction being identical with the price, no longer
would any cheerfully quick repayer subsidize the slow, slovenly or
evasive borrower” 0 He then, in a few lines in a long article, dis-
misses this as “impossible even in theory” and probably objection-
able on non-economic grounds such as loss of privacy70
While we accept that complete information is an unattainable
ideal, we argue that the present structures could be changed to
create stronger incentives for creditors to obtain reliable informa-
tion and to discourage consumers from supplying misinformation.
It is important to clarify the respective positions of creditor and
debtor at the time when the credit is granted, not after the credit
relationship has broken down and the options are much less
inviting.
Reliable information alone will not solve the collection problem.
Often collection problems arise because contingencies unforeseen,
and sometimes unforeseeable, materialize after credit has been
granted. To the extent that these possibilities have not been accurate-
ly reflected in the cost of the transaction, the creditor still faces a
collection problem if he is to avoid forcing other clients to sub-
sidize credit defaulters.
GOSupra, note 55, 28.
70 Ibid.
McGILL LAW JOURNAL
[Vol. 22
Present priority rules, as reflected in provincial Creditors Relief
Acts,7
0a the Lacombe Law and federal Bankruptcy legislation, which
permit all unsecured creditors, irrespective of the time at which
they granted credit, to share pro rate on a distribution, in our view,
seriously subvert the objective of improving the exchange of inform-
ation at the time credit is granted. These rules enable later creditors
to unilaterally and retrospectively falsify the information on which
an earlier creditor granted credit by subsequently creating competing
debt claims. The incentive to search out the best available inform-
ation on the credit risk to whom a creditor is considering extending
credit is reduced, as is the incentive of a later creditor to make a
similar search. Neither creditor will have priority.
In recognition of this problem, several commentators have pro-
posed the creation of a public credit register where all major, un-
secured debt claims must be registered if creditors are to preserve
their priorities. Priorities would be determined by order of reg-
istration and unregistered debt claims would be subordinated,
obviously, to all registered claims. 71
In the light of the Ontario Government’s continuing efforts at im-
plementing The Personal Property Security Act, 1967,711 by setting up
a central registry system for secured debt claims, one may question
whether a public registry is the key to the proposed priority system.
If on a distribution on an execution under the Creditors Relief
Act 71b or a distribution under a Part X type scheme or a consumer
bankruptcy, all unsecured creditors were simply ranked in order of
the date of granting credit, the substantial objective of this proposal
would be achieved. No one would risk granting any significant
amount of credit without making a serious effort to ascertain a
debtor’s existing commitments. The need for this information would
itself provoke an appropriate response in the private sector, through
the further expansion of credit rating bureaux. Privacy and consi-
derations of accuracy of information would seem to be adequately
protected through credit reporting legislation of the type already
in force in most provinces.7 2
Some problems of detail would remain to be resolved, such as
the back-dating of contracts by creditors to improve their priority
70a E.g., R.S.O. 1970, c.97.
71 See K.E. Wenk and J.E. Moye, Debtor-Creditor Remedies: A New Pro-
posal (1969) 54 Corn.L.Rev. 249; J. Ziegel, The Globe and Mail, October 2, 1970,
B-6.
71a S.O. 1967, c.73.
7lb Supra, note 70a.
72 Cf. W. A. Sturges, A Proposed State Collection Act (1934) 43 Yale L.J. 1055.
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
position, and the ranking of different credit grantors who grant
credit on the same day, especially “line” creditors, such as credit card
companies and revolving credit store account operations.
While it is already a criminal offence for a person to obtain
credit by fraud, the precedent of section 57 of the South Australia
Consumer Credit Act 19 72,11a which makes it a specific offence for a
consumer knowingly to provide false information in a credit applica-
tion, would seem a useful complementary reform, so that consu-
mers can have impressed upon them explicitly in credit applications
the importance of providing accurate information. It is as much in
their interests as a creditor’s that credit not be imprudently granted.
And, in any event, deliberate misrepresentation is indefensible from
whichever side of the market-place it comes.
The Montreal study showed a significant incidence (about 10%)
of credit breakdowns arising from transactions involving bait and
switch selling of carpet in the home, health studio “packages”, and
door-to-door sales of magazine subscriptions and encyclopedias. The
abuses that abound in these areas can be reduced through “cooling-
off” periods in door-to-door sales and more vigorous policing of
misleading advertising laws. Apart from incidences of outright de-
ception and merchant defaults, a good deal of credit delinquency
could be avoided by a vigorous information programme conducted
by various government agencies which presently receive and mediate
consumer complaints. The complaints records of firms, including
name, product and service sector, could be collated and disseminated
widely to the public. In effect, existing complaints agencies would
operate as business rating bureaux for consumers paralleling the
function that credit rating bureaux perform for merchants. While
problems of privacy and accuracy of information would need to be
resolved, these are not substantially different from problems faced
by consumers with credit rating bureaux and now the subject of
special legislation.
3. The externalities problem
a) Exemption from execution
The exemptions from execution in force in the various provinces
of Canada, especially the exemptions from wage garnishment, for
the most part, are extremely modest. For example, Alberta permitted
a married debtor to retain $200 per month plus $40 for each child,
72a Consumer Credit Act. 1972 South Australian Statutes 1972. Part II. no. 134.
458
McGILL LAW JOURNAL
[Vol. 22
and $100 a month in the case of single debtors. 3 While some other
provinces are relatively more generous, including Quebec, 74 the fact
remains that time and again in our interviews with debtors who had
been subjected to garnishment, we were told that following garnish-
ment, they quit their jobs and went on welfare or unemployment
insurance. The difference between the level of public welfare benefits
and the allowable exemption from garnishment was so small that
it was not worth working for the difference. For example, in our
Debtor Survey we interviewed a woman aged 26 with two small
children left by her recently deceased common law husband. She had
been working as a telephone operator but when her wages were
garnished she quit and went on welfare. She told us bluntly that the
only realistic employment alternative for her was prostitution
(where garnishment would be impractical) but had decided against
it (rather pragmatically) for fear of contracting venereal disease.
Table 20 from the University of Montreal study of Lacombe Law
debtors dramatically underscores this point.
TABLE 20
Situation
Poverty Line
Situation before making
the Deposit
Situation after making
the Deposit
Above the Poverty
Below the Poverty
Line
Line
TOTAL
61.7%
(145)
38.3%
(90)
235
26.8%
(63)
73.2%
(172)
235
The exemption levels in other, less generous, provinces would
necessarily reinforce the reaction of debtors similarly circumstanced
to those we interviewed. This represents a perfectly rational economic
calculation on the debtor’s part. The results are that the costs of
dredit breakdown are passed on to the public at large, and the
purpose of the garnishment procedure is, perhaps counter-intuitively,
subverted by the very illiberality of the exemptions. Clearly, wage
garnishment exemptions cannot be set below, at, or even marginally
above, the relevant welfare entitlements claimable by a garnished
debtor if the purpose of the law is to encourage him to continue
working and to pay off his creditor over time. The exemptions
must be set significantly above the relevant welfare entitlements so
73Alberta Rules of Court, Alta Reg. 390/68, Rule 483; a recent amendment,
July 15, 1976, has increased these amounts to $400, $80, and $300 respectively.
74 Art.553 C.C.P.
1976]
THE PATHOLOGY OF CREDIT BREAKDOWN
that a significant incentive
to work remains. The details are
no doubt difficult to ascertain, but the guiding principle is surely
clear. Any exemption formula should also provide for regular
adjustments to take account of changes in the cost of living and for
variations in the exemption in particular cases to take account of any
special circumstances of the debtor.
The same observations apply, in principle, to exemptions from
execution against personal property. For example, in terms of house-
hold effects, New Brunswick exempts only bedding, clothing, and
food for 3 months not exceeding $100 in value.75 Newfoundland and
Nova Scotia and Prince Edward Island exempt bedding, clothing
and necessary cooking utensils.6 As many debtors subject to seizure
in bur survey told us, and as is borne out by the extraordinarily high
percentage of claim settlements after seizure and before sale, the
only way of avoiding being divested of assets necessary for even
subsistence living is to borrow the amount of the creditor’s claim
from someone else –
perhaps a finance company from whom the
facts are concealed, a friend, or the neighbourhood loan-shark. The
debt problem is not solved; it is simply swept under another carpet.
b) Costs of wage garnishments to employers
The costs entailed for employers in administering wage garnish-
ments are clearly a major reason why some employers fire em-
ployees who are subject to garnishment. One American study found
that 53.1% of employers who discharged employees on account of
garnishment gave costs as the reason.7 Other American studies show
that an employer’s costs in administering a single garnishment
deduction run between $15 and $35.78
In Quebec employers are not permitted to make any deductions
for payments on a garnishment to defray expenses of administration.
This again involves a case of the creditor and debtor following credit
break-down being permitted by the law to transfer part of the costs
to an innocent, involuntary third party, who, of course, reacts pre-
dictably. It is not fair to the employer; ultimately, it is not in the
interests of the debtor, who stands to suffer from an adverse reaction
75 Memorials and Executions Act, R.S.N.B. 1973, C.M-9, s.33.
76 Judicature Act, R.S.N. 1970, c.187, s.123; Judicature Act, S.N.S. 1972, c.2,
s.41; Judgment and Execution Act, R.S.P.E.I. 1974, c.J-2, s.25.
77 C.K. Grosse and C.W. Lean, Wage Garnishment in Washington –
An
Empirical Study (1968) 43 Wash.L.R. 743, footnote 78 on page 756.
18 Ibid., footnote 74, 756; Western-Center on Law and Poverty, Wage Garnish-
ment –
Impact and Extent in Los Angeles County (1968).
McGILL LAW JOURNAL
[Vol. 22
by the employer; and it is not in the interests of the creditor who
also suffers in the event of the debtor being fired. The employer
should be permitted to deduct a realistic sum from garnishment
payments to cover costs and these should be absorbed by the collec-
tion process like other costs.
4. Transaction costs
There are several issues involved in the transaction costs generat-
ed for creditors and debtors by the collection process.
Firstly, can these costs be reduced? Does all service of process
need to be personal? Why should service not be required by re-
gistered post in the first instance, and personal service only permit-
ted where service by post proves impossible? All sales following
seizure by unsecured creditors and perhaps some sales following
repossession by secured creditors (in the absence of recourse agree-
ments with the dealer) should be held at a well-advertised, accessible
place and time each month to maximize the number of buyers attend-
ing sales and reduce the needless “value destruction” that invariably
occurs. In those common law provinces which still require separate
wage garnishments to be filed against a debtor each pay day or each
pay period, a single garnishment against a given employer having
continuing effect until the debt is liquidated should be permitted.
More difficult issues are raised by the question of state sub-
sidization of transaction costs. Many provinces permit creditors to
sue in provincial Small Claims Courts where process costs are
nominal. The rationale for subsidization of ligitation costs in Small
Claims Courts is a desire to provide roughly equal access to the
courts for both business and non-business litigants by attempting to
compensate non-business litigants for the scale economies available
to business litigants. Why the subsidy should be extended to the
latter is not clear and even though higher costs engendered in other
courts will often be passed on to the debtor, it may be that in the
present context this position provides a more desirable regime of
incentives and disincentives to the formal coercive collection pro-
cesses.
If the true costs of coercive collection are concealed through state
subsidies of the collection process, both creditors and debtors have
less incentive to exchange the information which might prevent un-
necessary court costs. Public subsidies for the costs of credit break-
down would be better directed to the income security problem so
that improper use of credit is discouraged at the outset. In addition,
our earlier proposal allowing a debtor to invoke the intervention of a
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
Credit Referee or Debtors Assistance Board before coercive enforce-
ment of a judgment proceeds would operate to mitigate normal litiga-
tion costs, although involving some public subsidy.
5. Due process
The constitutional debates that are currently raging in the United
States over a debtor’s constitutional right to due process before his
property can be adversely affected, have clear policy implications
for Canada. A compelling policy argument grounded simply in con-
siderations of equity (quite apart from constitutional considerations)
can be made out for a requirement of due process in certain cases: 7
prejudgment garnishments, utility cut-offs by statutory monopolies
such as gas, hydro, and telephone utilities where there is no alterna-
tive source of supply, 0 self-help repossession by secured creditors.
An actual hearing, rather than a reasonable opportunity for a
hearing, is not necessary in every case. Due process requirements
would seem sufficiently met if the debtor were able to fill out a
portion of the process form in each case where he desires a hearing;
the process should be suspended pending the hearing. In the case of
self-help repossession where in many common law provinces no
formal process is required, prior notice of repossession should be
required and this notice could then be framed so as to permit a
request for a hearing. The procedure here suggested is closely mo-
delled on the provisions of the Saskatchewan Limitation of Civil
Rights Act”‘ which also empower the judge on the hearing, irrespec-
tive of the validity of the creditor’s claim, to make a number of
discretionary orders, including suspension of repossession and res-
cheduled instalment payments. This seems a useful ancillary power
and may avoid needless destruction of the value of the debtor’s
property.
6. Defects in statutory rehabilitative schemes
The Part X wage earner scheme under the federal Bankruptcy
Act,s1
a the Quebec Lacombe Law variant thereof, and proposals
contained in the new federal Bankruptcy Bill8lb for amending Part X,
70 See U.S. National Commission on Consumer Finance, supra, note 4a, 27-31.
80 In Montreal, our research indicates that utility cut-offs run at between
about 3,000 and 6,000 per major utility each year.
81 R.S.S. 1965, c.103, s.19-22A.
8a R.S.C. 1970, c.B-3.
81bAn Act Respecting Bankruptcy and Insolvency, Bill C-60, 1st reading,
May 5, 1975.
McGILL LAW JOURNAL
[Vol. 22
all suffer from certain common defects given the ostensible rehabili-
tative objectives of the legislation.
The first problem pertains to secured creditors. One of the attrac-
tions for a debtor to enter into a Part X scheme rather than to go
bankrupt is that he is able to keep his property in return for an un-
dertaking to pay off his debts in full over a period of time (3 years
under Part X). Secured creditors are, however, exempted from Part
X with the result that many debtors whose major assets are subject
to security will find it more rational to go bankrupt where the assets
are still lost but three years of payments can be avoided. To make
the discipline involved in making three years’ payments an attractive
alternative to personal bankruptcy, which is prejudicial both to the
debtor and his creditors generally, secured creditors should be
subject to Part X, thus freezing their security during the duration of
a scheme, payments to them being subject to the same rate of deter-
ment as that applied to other creditors. On the termination of the
scheme (if it is a composition as proposed in the Bankruptcy Bill),
the unpaid residue of their claims should revive, payable at the con-
tract rate, with their security then realizable in the event of further
default. Without such restrictions on the rights of secured creditors,
they will be in a position to subvert many Part X type schemes by de-
stroying any incentive for the debtor to enter into such a scheme and
prevent creditors generally from obtaining the benefit of the debtor’s
payments, a benefit which disappears, of course, once bankruptcy
occurs.
It is, no doubt, true that these proposals will have some impact
on secured creditors’ lending and pricing policies. These costs may
be outweighed by the rehabilitative virtues of Part X where a debtor
is forced to adjust to an imposed form of budgetary discipline, the
value destruction inherent in bankruptcy is avoided, and unsecured
creditors who almost always lose in a bankruptcy, are satisfied.
The second problem is that of after-acquired creditors. Under
a Part X scheme, the debtor is entitled to retain a reasonable living
allowance out of his wages (under the Lacombe Law, the non-
garnishable portion of his wages). Because this exemption is fixed,
a debtor under the scheme has little or no incentive not to run up
further debts, as he suffers no immediate consequences. If further
creditors are simply brought under the scheme, the short-run, ter-
minal rehabilitative purpose of the scheme instead becomes a per-
manent way of life encouraging greater financial irresponsibility.
As we have already pointed out, improved exchange of information
at the time that credit is granted should ensure that future creditors
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
are more frequently aware of the debtor’s circumstances before they
extend credit. Secondly, it might perhaps be made a criminal offence
for a debtor to obtain further credit while under the scheme.
Thirdly, if credit is in fact so obtained, this should be treated as
terminating the scheme in the sense that creditors then become free
again to invoke their normal collection remedies while the debtor
may consider personal bankruptcy.8 2
The third problem with Part X and similar schemes is the prin-
ciple of voluntarism in regard to payments adopted in the legislation.
In general, the initiative rests with the debtor to make the appro-
priate payments into court each pay day. The consequences are pre-
dictable. They are indicated in Table 21 from the University of
Montreal study of Lacombe Law debtors. 83
TABLE 21
RATE OF ANNUAL PAYMENTS
(extrapolated)
–
–
–
31 months = $641
91/ months = $163
151 2 months = $ 75
$1,000
$500
0
Time elapsed since inscription (in months)
6
12
18
Table 22 from the University of Montreal study, projects the
peribds of payments that would be required for debtors to liquidate
their debts considering both the deposits already made and the
debts to be liquidated:’
82 For a more extended discussion of some of these issues, see Canadian
Consumer Council, Report on Personal Bankruptcy, June 7, 1972.
83 Supra, note 17, table 43, 97.
84Ibid., 104.
Inscription:
Periods of
Payments
Necessary
No Possibility
More than 20 years
From 15-20 years
From 10-15 years
From 5-10 years
From 0- 5 years
No Claims
TOTAL
McGILL LAW JOURNAL
[Vol. 22
TABLE 22
6 to 12
months
1972
1 to 5
months
1973
6 to 12
months
1973
19
(16.3%)
21
(18.1%)
10
(8.6%)
20
(17.2%)
12
(103%)
24
(20.6%)
28
(25.6%)
17
(15.6%)
5
(4.5%)
6
(5.5%)
13
(12.0%)
30
(27.5%)
10
(8.6%)
116
(32.8%)
10
(9.1%)
109
(30.8%)
35
(27.3%)
12
(9.3%)
0
(0.0%)
7
(5A%)
15
(11.7%)
41
(32.0%)
18
(14.0%)
128
(36.2%)
TOTAL
82
(23.2%)
50
(14.1%)
15
(4.2%)
33
(9.3%)
40
(11.3%)
95
(27.0%)
38
(10.7%)
353
(100.0%)
This pattern is reinforced by the Alberta study of Part X debtors,
where over 50% were in arrears in their monthly payments, 41.67%
being 90 days or more in arrearsY5
The reasons for this seem obvious. Firstly, debtors suffering from
a chronic income deficiency, caused by unstable employment, sick-
ness or high day-to-day family financial outgoings, simply cannot
pay anything. They have no discretionary income from which to
make payments. Wage earner plans can be of no use to them.
Secondly, to the extent that the exempted portion of a debtor’s wage
is lower than welfare entitlements, he will simply stop working, as
in the case of garnishments. Thirdly, the reason why many debtors
are financially distressed is that they lack budgetary self-discipline.
To expect them to develop it overnight and maintain it over a
period of several years is simply naive. We argue that, provided the
exemptions are realistic, a debtor’s payments under Part X or the
Lacombe Law or indeed any instalment or consolidation order made
by a court, should be deducted at source as in the case of a garnish-
ment.
8 Supra, note 22, 6.
19761
THE PATHOLOGY OF CREDIT BREAKDOWN
Moreover, if creditors are expected to forego their normal collec-
tion rights for an extended period, as Part X entails, it seems reason-
able that there be some assurance of continuity of benefits to them
under the scheme. Deduction at source is an accepted principle for
all kinds of other imposts, and again provided the exemptions are
realistic and provision is made for variation in the event of un-
foreseeable changes of circumstances, it is hard to see what .objec-
tion can be made against it.
The final issue raised by the Part X type wage earner scheme is its
relationship to personal bankruptcy. It is now widely argued that
the bankruptcy process should serve a rehabilitative function as well
as providing a collection tool for creditors.86
On the one hand one might argue that for a debtor who is hope-
lessly overcommitted, any prospect of being able to lift himself out
of his financial mire and start afresh dictates bankruptcy where, in
return for surrendering his non-exempt assets to his creditors, he is
permitted to unload his debts and obtain a discharge within a very
short period. However, on the other hand, a readily available bank-
ruptcy regime, which is not restricted in its availability to debtors of
the kind above described, encourages not rehabilitation but financial
irresponsibility. Curiously, neither the existing Bankruptcy Act, the
Study Committee’s proposals for a new Bankruptcy law 8 nor the
new Bankruptcy Bill itself attach any significant conditions to a
debtor’s right of access to bankruptcy. For example, one might have
thought that one precondition on which the Bankruptcy Court should
be required to be satisfied before accepting a debtor’s assignment is
that a wage earner plan under Part X is not feasible because of the
scale of overcommitment relative to the debtor’s projected income
stream. If it is feasible for a debtor over, say three years to pay off
all or a substantial portion of his debts, is there any case for making
bankruptcy available to him? Again, to return to Leff’s point, if
cooperative (collective) accords between a debtor and his creditors
generally produce the most mutually advantageous settlements of
claims, and creditors are to be discouraged from unilateral use of
coercive collection remedies, should debtors have total freedom to
repudiate unilaterally, through bankruptcy, their obligations to their
creditors?
8See e.g., Report of the Study Committee on Bankruptcy and Insolvency
Legislation, Ministry of Consumer and Corporate Affairs, Information Canada
(1970), 86.
871bid.
McGILL LAW JOURNAL
[Vol. 22
7. Discriminatory regulation
Collection agencies are state licensed and regulated in every pro-
vince in Canada and certain collection practices prohibited. It is
difficult to justify singling out collection agents for regulation.
If a collection practice is offensive and unacceptable, then it is
offensive and unacceptable whether it is engaged in by collection
agents, bailiffs, lawyers acting for creditors or collection agents,
or by the creditor himself. Only British Columbia in its Debt Collec-
tion Act”8 and Manitoba in its Consumer Protection Act8 9 have ac-
cepted the logic of this. It is important in legislation proscribing
certain collection practices that civil consequences be attached to
the use of these practices (e.g., unenforceability of the debt claim) so
that enforcement resources, public and private, are optimized, and
all enforcement
initiatives do not rest with a typically under-
resourced state agency 0
In the case of bailiffs in Quebec, their position both as official
court officers and as entrepreneurs working directly for creditors on
a piecework basis involves a hopeless conflict of interest. One
of two solutions seems open. The first is to make them full-
time salaried employees of the court, like other court officials, as is
the.case in many other jurisdictions. If this is thought likely to be
less efficient than an entrepreneurial bailiff system, then at least
bailiffs should be recognized for what they presently are: collection
agents for creditors. If this is to be the case their self-regulating
status should be completely withdrawn. They should be licensed
and regulated by an independent state authority, as in the case of
other collection agents.
8. The process of reform
Over the past fifteen years, the area of consumer credit has
attracted more legislation than any other area of consumer pro-
tection. Western jurisdictions have accumulated a great deal of ex-
perience in judging the efficacy of different legislative approaches.
It is surely time to review and consolidate that experience, abandon-
88 S.B.C. 1973, c.26, s.14.
89 R.S.M. 1970, c.C-200 as am. by S.M. 1970, c.63, s.100.
90 E.g., S.M. 1970, c.63, s.102, where a debtor is given a right to recover from
the creditor three times the amount of the debt if the creditor charges the
debtor with an amount not rightfully collectible under s.100.
1976)
THE PATHOLOGY OF CREDIT BREAKDOWN
467
ing the intuitive method that has characterized public policy-making
up to now.
The goal in Canada might well be a uniform provincial Consumer
Credit Code. As a first, and urgent, step towards this goal, the task
of improving our data collections on critical questions must be
embarked upon. The various debtors’ assistance courts and agencies
dealing with debt problems should be encouraged, across all juris-
dictions, to develop common indicators for collecting and reporting
relevant data. We make no claims to have performed this task in
our very modest study; this is just a beginning. Without hard, em-
pirically unassailable facts, policy-making in the regulation of the
consumer credit market will remain what it has always been –
at
best an exercise in accidental wisdom.
