Canada’s record insolvencies are the calm before the debt storm, experts say

Insolvency filings hit a record high in April, falling 43.5% from a year ago. The drop follows a full month of shutdowns in most Canadian provinces, according to a Scotiabank report. Once the economy reopens, those insolvency filings should not only rebound, but they could trigger a massive wave, according to licensed insolvency trustees.

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

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

The report says the pause was largely caused by court closures during the pandemic, slower processing times and federal benefits that have kept many Canadians afloat, such as the Canada Emergency Response Benefit. (CERB).

However, the pandemic has put Canadian households in financial difficulty, as incomes have been disrupted and more households have had to take on debt. The authors of the Scotiabank report explain that it is very likely that there will be an increase in insolvencies in the coming months as the economy emerges from confinement and support measures end.

Terrio added that another reason for the drop in filings is that once a bankruptcy or consumer proposal proceeding begins, it must be followed through. He advised his clients not to commit to a file at this time, especially since their professional future is uncertain.

Year-over-year consumer insolvencies fell 43.5% in April after a full month of closings, courts closed and filings slowing.

Prior to the break, insolvency filings had risen steadily, according to data from the Office of the Superintendent of Bankruptcy (OSB). We were already facing a cyclical tidal wave of insolvencies that was probably going to last two, three years at least,” Terrio said, further adding that he did not anticipate this new insolvency surge to be a peak. fast, but a longer wave. .

Unemployment will be the main accelerator of this anticipated wave of insolvencies, said Terrio Yahoo Finance Canada. Many industries have been deeply affected, leaving fewer Canadians with jobs to return to in the post-pandemic world. Businesses have adapted to falling revenues by laying off employees and cutting costs.

“They’re going to be looking to operate on as low a cost as possible for as long as they can because they’ve just been bleeding money for three months. So don’t expect employers to bring all 100% of employees back if they can operate on 50% or less,” Terrio said, “it won’t just be like flipping a switch.

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

Hoyes, Michalos & Associates released an insolvency report for Ontario, finding similar trends across the country. Consumer insolvency in the province fell 36.2%, the lowest volume of filings in nearly 20 years, according to company estimates.

The slow return to normal, particularly with job availability, could contribute to more filings down the line.

“[If] two or three months go by and their jobs aren’t back, or they’re way off the mark [regular] number of hours, so they’re going to be in real trouble,” Terrio said, “So once this opens up, I think insolvency filings are going to be flying for a long time.

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