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Record low insolvencies in Canada are the calm before the debt storm, says experts

Stephanie Hughes
·Financial Journalist
·3 mins read
Japanese man with eyeglasses siting on floor in the living room and using smart phone and laptop for managing home finances
Japanese man with eyeglasses siting on floor in the living room and using smart phone and laptop for managing home finances

Insolvency filings hit a record low in April, dropping by 43.5 per cent compared to last year. This drop followed a full month of lockdowns across most Canadian provinces, according to a report by Scotiabank. Once the economy reopens, these insolvency filings are expected to not only bounce back, but they could trigger a massive wave, according to licensed insolvency trustees.

“Even though the filings have paused, it’s kind of like re-loading the shotgun,” said Scott Terrio, manager of consumer insolvency at Hoyes, Michalos & Associates.

“I think what's going to happen now is in the late summer and fall, you're going to see even more filings than we would have otherwise seen.”

The report said that the pause was largely caused by court closures during the pandemic, slower processing times, and federal benefits that kept many Canadians afloat, like the Canadian Emergency Response Benefit (CERB).

However, the pandemic put Canadian households under financial stress as incomes were disrupted and more households had to rely on debt. The authors of the Scotiabank report explain that it is very likely that there will be an uptick in insolvencies in later months as the economy emerges from lockdown and the support measures wind down.

Terrio added that another reason for fewer filings is that once a bankruptcy or consumer proposal procedure begins, it must be followed-through. He has been advising clients to hold off on committing to a filing at this moment, particularly as their employment future is uncertain.

Year-over-year consumer insolvencies dropped by 43.5 per cent in April after a full month of lockdowns closed down courts and slowed down filing procedures.
Year-over-year consumer insolvencies dropped by 43.5 per cent in April after a full month of lockdowns closed down courts and slowed down filing procedures.

Before the pause, insolvency filings had been on a steady increase, according to data from Office of the Superintendent of Bankruptcy (OSB). We were already facing a cyclical tidal wave of insolvencies which was going to last probably two, three years at least,” Terrio said, further adding that he doesn’t anticipate this new surge in insolvencies to be a quick spike, but a longer wave.

Unemployment will be the main accelerant to this anticipated wave of insolvencies, Terrio told Yahoo Finance Canada. Many industries were deeply impacted, leaving fewer Canadians with jobs to return to in the post-pandemic world. Businesses have been adapting to diminished revenues by laying off employees and cutting back costs.

“They're going to seek to operate on as little cost as possible for as long as they can because they just bled money for three months. So don't expect employers to bring all 100 per cent of the employees back if they can function with 50 per cent or less,” said Terrio, “It's not just going to be like turning on a light switch.”

The 2021 tax season could extend this wave further as many Canadians who have had to rely on CERB will now face tax implications which could range from hundreds to over one thousand dollars. Working with a tighter cashflow during a pandemic means that many Canadians may not be able to set aside the money owed for tax time, Terrio anticipates.

Hoyes, Michalos & Associates released an insolvency report for Ontario, finding similar trends reflected across the country. Consumer insolvencies in the province dropped by 36.2 per centm the lowest volume of filings in almost 20 years, according to the firm’s estimates.

The slow return to normal, particularly as far as job availability goes, could contribute to a larger number of filings down the line.

“[If] two or three more months goes by and their jobs are either not back, or they're nowhere near the [regular] number of hours, then they're going to be in real trouble,” Terrio said, “So once it opens up, I think the insolvency filings are going to be flying for a long time.”