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Government support measures, absence of typical insolvency triggers and delayed filings push insolvencies to lowest level since 1999 

TORONTO, ON – February 5, 2021 – Canadian insolvency filings for 2020 hit their lowest level since 1999 as a flood of government support programs temporarily offset devastating income shock and economic uncertainty brought on by the COVID-19 pandemic. 

Overall filings for the year, including all consumer bankruptcies and proposals, and business bankruptcies, totalled 99,244, representing a 30 per cent decline compared to 2019, according to the data from the Office of the Superintendent of Bankruptcy. Total insolvencies were down almost 40 per cent from their peak in 2009. Consumer insolvencies were down 30 per cent compared to the previous year, an 18-year low. Meanwhile, business insolvencies reached the lowest level since tracking began in 1987, down 24 per cent compared to 2019.

“These historic low insolvency filings reflect the government aid programs that have kept many individuals and businesses afloat despite the significant financial distress caused by the pandemic. What we can’t see in the insolvency data yet is how things will change as the taps are turned off,” says Mark Rosen, Chair of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), the national voice on insolvency matters in Canada.

Business insolvencies for the 12 months ending December 31, 2020, decreased by 24.3 per cent compared with the same period the year prior. Arts, entertainment and recreation, as well as management of companies and enterprises, experienced the biggest increase in insolvencies. The two sectors that registered the largest declines were construction and manufacturing.

“Pandemic-related financial devastation forced many Canadian businesses to close their doors for good last year. These closures aren’t accounted for in the insolvency data because many of them walked away without filing a bankruptcy,” says Rosen.

Compared to last year, consumer filings were down 33.5 per cent in the fourth quarter. Following a record year-over-year decline in the second quarter (45.4%), consumer insolvencies for the 12 months ending December 31, 2020, decreased by 29.7% compared with the year prior.

All provinces experienced declines in consumer insolvency filings in 2020, some more than others. Many of the Atlantic provinces saw the largest decreases, including Prince Edward Island (-43.1%), Nova Scotia (-42.1%) and Newfoundland and Labrador (-41.9%). This was followed by Quebec (-37.8%), New Brunswick (-30.6%), British Columbia (-26.3%), Ontario (-24.2%) and Saskatchewan (-23.5%). Alberta (-21.5%) and Manitoba (-19.7%) experienced the smallest decreases in filings.

Government support measures kept individuals and business afloat

With a record number of Canadians collecting unemployment insurance, and businesses forced to close to combat the spread of the coronavirus, the plunge in insolvency activity may seem counterintuitive. Rosen says that government support measures, business loans and creditor flexibility replaced much of the lost income and pushed savings to record levels.

“For the last year, government subsidies, interest-free loans, provincial grants, and deferred loan payment options removed immediate financial pressures that often force an insolvency decision,” he says.

Typical insolvency triggers virtually non-existent in 2020

“Calls from creditors and notices of eviction or foreclosure are common triggers that force people to seek debt-relief options. But in 2020, these triggers were virtually non-existent,” says André Bolduc, executive board member of CAIRP and Licensed Insolvency Trustee. “Generally speaking, creditors were not collecting aggressively, businesses were not getting sued for missed payments, and mortgage companies were giving forbearances on people’s home loans.” 

Bolduc says that creditors – from financial institutions to credit cards and service providers –  are now starting to ramp up collections.

“After a very long pause, we are starting to see individuals with judgements obtained against them as creditors attempt to catch them up on their payments,” he says.

Uncertainty delayed filings as Canadians spend longer in the ‘financial sweatbox’

Even under normal circumstances, there is often a long delay between when people start to recognize the severity of their debt problems and when they take action. Debtors may struggle needlessly for years to pay their debt and, only after prolonged financial hardship, do they seek debt-relief. Bolduc says the uncertainty created by the pandemic has prolonged the time severely indebted Canadians spend in the ‘financial sweatbox.’

“Many families and businesses that were on the verge of insolvency before the pandemic paused any financial decisions. Now they have gone months without generating income and have little ability to catch up on overdue bills with their future earnings. When crushing payments come due on debt deferrals, that’s when we will start to see insolvencies increase significantly,” he says.  

Individuals often overestimate their ability to recover financially without help. Eventually, they may be subject to pressure from creditors, aggressive calls from debt collection agencies or wage garnishment, all of which become a catalyst for seeking help.

Bolduc says that those who are struggling are generally better off seeking guidance right away. That’s because the insolvency process automatically protects debtors from creditors’ collection efforts and provides them with a systematic way of working out their repayment plans with expert guidance. 

Insolvency as a safety valve for individuals and businesses

The insolvency process in Canada exists as a safety valve for individuals and businesses in financial distress. It protects the rights of debtors as well as creditors, offering the possibility of a fresh start and spreads losses. If it is determined that bankruptcy or a proposal is the best course of action, the dual role of a Licenced Insolvency Trustee is to ensure that the debtors’ rights are not abused and protect the rights of creditors as well.

“The stigma associated with bankruptcy implies some flaw or failing on the part of the filer. But nothing could be further from the truth, especially considering the financial setbacks over the last year. Getting debt-help should be viewed as a responsibility, not a failure,” Bolduc says. “Once an individual or business is in severe financial difficulty, it is in everyone’s interest – theirs and their lenders – that they seek counsel from a Licensed Insolvency Trustee.”

Licensed insolvency trustees are the only debt professionals in Canada that can discharge people and businesses from debt and administer consumer proposals and bankruptcies. They provide customized, impartial guidance on the wide range of debt relief options available to Canadians. These may include striking a deal with creditors through an informal debt settlement, consolidating all debts into one monthly repayment, making a debt repayment plan through a consumer proposal, or declaring bankruptcy.

“The pandemic has added additional layers of complexity for debtors. For example, for many business owners that shut down as a result of government safety measures, their personal and financial lives are intertwined. They may have personal guarantees on loans for their business. If their business is failing as a result of the pandemic, it could mean personal insolvency. Every situation is unique, which is why it is important to get advice from a licensed professional,” he says.   “The sooner they get help, the more options they will have to restructure their debt.”