True extent of Canadian insolvencies may not be seen for years

The lag between a negative economic event and people taking action to fix their finances mean insolvencies may be in the future

True extent of Canadian insolvencies may not be seen for years
Steve Randall

It’s easy to be calmed by top-line stats, but the true story is often a longer one with several plot twists.

Such is the story of the pandemic with a desire to cling to positives disguising some uncomfortable truths, including the potential for a rise in insolvencies for Canada’s debt-burdened households.

The latest figures from the Superintendent of Bankruptcy show that in the second quarter of 2020, there was a record decline in the number of Canadian households filing for insolvency.

And it was no small decline. It was a drop of 42% quarter-over-quarter and 45% year-over-year.

However, this is likely to be skewed by reduced ability to file and the fact that most of us were focused on not getting sick and the sheer magnitude of the crisis.

Trouble ahead
Mark Rosen, chair of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), says the real impact of the pandemic on insolvency rates is ahead.

“The bankruptcy statistics have yet to reflect the pandemic-related financial distress of many Canadian households,” he said. “Government stimulus has put cash into unemployed people’s hands every month allowing them to cover basic living expenses, pay rent and make their minimum payments.”

Rosen added that Canadian households were already burdened by record debt and the shock impact of losing their job or having income slashed, will have been a severe blow to those living paycheque-to-paycheque.

Although COVID-19 is likely to create more financial distress for households, there is often a long delay between when people start to recognize the severity of their debt problems and when they take action. Many debtors struggle needlessly for years to pay their debt and, only after prolonged financial hardship, do they seek relief,” added Rosen.

Financial sweatbox
CAIRP’s chair warns that many Canadians will be in the “financial sweatbox”, a harrowing time when struggling households may face harassment from creditors, aggressive calls from debt collectors, and wage garnishment.

But waiting to get help only exacerbates the issue.

“If you are receiving phone calls from creditors or are worried about a garnishment, it is a sign you need expert advice right away,” said André Bolduc, executive board member of CAIRP and Licensed Insolvency Trustee.

“Those in severe financial distress fear they will lose everything by filing an insolvency. In reality, by seeking professional advice, they may be able to save important assets like their house or car,” he added.

Business insolvencies
Official stats also show that business insolvencies posted a record decline in the second quarter, down by 31.3% compared to the first quarter and by 37.7% compared to the same quarter last year.  

But again, these figures have been improved by support for businesses, which won’t continue for long. But Rosen says there are often options for pressured business owners.

“Many businesses have benefitted from government aid programs which have allowed them to avoid insolvency. But many others will choose to close their doors without filing simply because they may not understand their options. For others, lending institutions may determine that formal proceedings are not to their advantage. By reviewing the business’ financial situation, we help determine the best course of action,” he said.