Bankruptcy: The Role of Parents in Assisting Their Children

Ian Wood, CFP, CIM, MFA-P

The rising wave of insolvencies in Canada, which we discussed in part one of this three-part series, has left many families grappling with financial difficulties​. This increase has been predominantly driven by consumer insolvencies, which have increased by 13.8% from May 2022 to May 2023¹​. Amid this financial turmoil, it has become increasingly common for parents to dip into their retirement savings to bail out their financially distressed adult children. This article, part 2 of 3, seeks to explore the option of bankruptcy and its implications, and why parents might want to consider guiding their children to speak with a Licensed Insolvency Trustee instead of outright financial rescue.

According to the OSB, the top five reasons for bankruptcy are Loss of Income (48%), Medical Reasons (21%), COVID-19 Pandemic (16%), Relationship Breakdown (12%) and the Financial Support of Others (5%).  So, while 72% of debtors provided reasons related to “Financial Mismanagement”, it’s clear that there are significant other factors related to the need to look at insolvency².  These other reasons may be why many parents feel an obligation to assist their children.

In Canada, bankruptcy is a legal process governed by the Bankruptcy and Insolvency Act, providing individuals who are unable to meet their debt obligations with a fresh start. According to Michelle Metail, a Senior Insolvency Advisor at BDO, the duration of a first-time bankruptcy can last for either 9 or 21 months, depending on the individual's income level and family size. The bankruptcy process involves the surrender of certain assets in exchange for the discharge of most, if not all, of their debts. The process is overseen by a Licensed Insolvency Trustee, a professional regulated by the Office of the Superintendent of Bankruptcy Canada.

Victoria Doell, a Licensed Insolvency Trustee with BDO, provided an alternative response to simply providing children with the funds to pay off debts. For some, she proposed that a consumer proposal, a legally binding process governed by the Bankruptcy and Insolvency Act, might be a more appropriate solution. A consumer proposal allows debtors to retain their assets while paying back a portion of their debts over a period of up to five years. For example, if a parent wants to help their child who owes $20,000, if the child goes through a consumer proposal, maybe they can get it cleared away with $11,000. The parents can save $9,000 this way.  The specific dollar amounts will vary case-by-case, but the concept remains. 

Furthermore, it's worth noting that consultations with most Licensed Insolvency Trustees like BDO are free of charge, providing a no-risk opportunity for individuals to understand their financial situation better and explore potential solutions. During this consultation, individuals can learn about both the benefits and implications of each insolvency option, enabling them to make an informed decision about their financial future.

If parents are considering helping their children financially, guiding them towards a consultation with a Licensed Insolvency Trustee could be a more beneficial first step than immediate financial assistance. Not only does this provide an opportunity for their children to understand the gravity of their financial situation, but it also allows them to learn about managing finances responsibly. As Metail and Doell noted, in both bankruptcy and consumer proposals, debtors are required to attend two counselling sessions – one focusing on budgeting and the other on setting financial goals and the responsible use of credit. This can be a valuable learning experience for young adults and set the foundation for more effective financial management in the future.

While the instinct to protect and assist their children is natural for many parents, guiding them to seek professional advice about their financial situation might be a more beneficial approach in the long run. By doing so, they equip their children with the tools to navigate their financial future and potentially save significant amounts of money that would otherwise be drawn from their retirement savings. As we continue to navigate the increasing insolvency rates in Canada, it's crucial to consider all available options and make informed decisions for the financial well-being of both the current and future generations.

Ultimately, as a financial advisor, you are often acting in a role where the client is looking for your opinion or even permission to help their child.  It is your responsibility to help your clients understand their options and the long-term impact of different decisions.

Next week, we explore how financial advisors can become better equipped to advise their clients on managing debt and planning for future financial security in our final installment in this series.

Bottom Line: Advisors working with parents considering financial aid for their debt-laden children may find it more advantageous to guide their clients to advise their children toward professional consultation first, as the educational aspects of insolvency processes can provide valuable financial management skills and potentially significant savings for the child and the parent.

References:

1. Office of the Superintendent of Bankruptcy Canada. (2023). Insolvency Statistics in Canada—May 2023 (Highlights). https://ised-isde.canada.ca/site/office-superintendent-bankruptcy/en/statistics-and-research/insolvency-statistics-canada-may-2023-highlights
2. Government of Canada. (2023). Canadian Consumer Debtor Profile – 2021. https://ised-isde.canada.ca/site/office-superintendent-bankruptcy/en/statistics-and-research/canadian-consumer-debtor-profile-2021