Stay-at-home measures put personal finances on lockdown, accumulation of arrears present challenge ahead for indebted Canadians
TORONTO, ON – December 3, 2020 – Insolvency numbers remained sharply lower in October compared to last year, although up slightly from the month prior. The number of consumer insolvencies in October 2020 was 38.4 per cent lower than in October 2019 but up 6.2 per cent compared to September 2020, according to new data released today from the Office of Superintendent of Bankruptcy (OSB).
“We are starting to see modest increases month-over-month, but overall government stimulus coupled with debt forbearance have depressed filings thus far into the COVID pandemic,” says Mark Rosen, Chair of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), the national voice on insolvency matters in Canada.
Rosen points to the fact that delinquency rates in Canada remain low. In the third quarter, Canada’s overall non-mortgage consumer-level delinquency rate fell 48 basis points compared to the prior year, according to TransUnion.[i] Over the same period, credit card balances declined by 11.6 per cent, and average non-mortgage consumer debt declined (-4.2%) as Canadians decreased spending and increased payment activity.[ii]
“A latent benefit of the stay-at-home measures is that personal finances are also on lockdown. With the removal of opportunities to spend, Canadians are forced savers right now, decreasing their socializing and travel costs,” says Rosen. “For those whose budgets have been hit hardest by the pandemic, payment deferrals and government support may not have prevented them from taking on additional debt to make ends meet.”
Approximately 12 per cent of new credit products in the third quarter were opened by Canadians who already had some form of deferral on their credit file, according to Equifax[iii].
“With potentially less flexibility among lenders during the second wave, more income or job loss on the horizon, and government aid tapering off, we expect to see the insolvency rate increase across the country. Some areas will be hit harder and faster than others,” explains Rosen.
Across Canada, British Columbia saw the largest increase in consumer insolvencies in October, up 14.1 per cent compared to September. Alberta (9.0%), Quebec (8.5%), Ontario (6.5%), Saskatchewan (5.9%) and Nova Scotia (2.5%) also experienced an increase in consumer insolvencies. Meanwhile, there were decreases in Manitoba (-11.3%), Prince Edward Island (-10.3), New Brunswick (-8.9%), and Newfoundland and Labrador (-5.8%) compared to the previous month.
Lockdown Debt: Accumulation of arrears present challenge ahead particularly for deeply indebted & low-income
“Many deeply indebted Canadians have deferred payments to keep up with bills, loan payments and mortgages due to the impact of COVID-19. That might have offered temporary relief on current cash flow needs, but it has built up payments that will need to be made at some point in the future,” explains André Bolduc, executive board member of CAIRP and Licensed Insolvency Trustee.
“The accumulation of arrears – these additional lockdown debts – can drag lower-income families under, particularly if creditors start trying to catch them up on payments. For example, when an individual gets a three-month minimum payment deferral on their credit card, interest continues to accrue. When payments restart, the minimum payment will be higher due to the additional accumulated interest.”
Over 3 million Canadians have taken advantage of deferral programs since the onset of the pandemic, according to third quarter data from Equifax and TransUnion.[iv]
“Before the pandemic, households with the lowest income already owed more for every dollar of household disposable income. So you can see how these individuals, many who have now had a significant decrease in income and have deferred payments, will struggle more to recover financially,” explains Bolduc.
Annual trends show that households in lower-income quintiles tend to have a higher debt to disposable income ratio. In 2019, for example, households in the lowest income quintile had a credit market debt to disposable income ratio of 281.7 per cent, while the highest income quintile was 139.8 per cent.[v]
While the full economic consequences of the coronavirus are unknown, Bolduc says that creditors will eventually seek to catch individuals up on their payments. He urges those struggling to seek advice from a Licensed Insolvency Trustee before finding themselves even more in over their heads.
Licensed Insolvency Trustees are empowered to provide protection from creditors. If it is determined that bankruptcy or proposal is the best course of action, the dual role of the Licensed Insolvency Trustee is to ensure that the debtors’ rights are not abused and to protect the rights of creditors.
“The insolvency process exists to protect the rights of debtors as well as creditors and to give people a fresh start. As soon as an individual files for insolvency, they are protected from creditors, which can also include protection from collection agency calls and wage garnishment,” says Bolduc.
As the only federally regulated debt professionals, Licensed Insolvency Trustees 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.
In an effort to maintain social distancing measures while continuing to support those in need of financial assistance, many Licensed Insolvency Trustees across the country are providing free contactless consultations virtually or by phone.