Insolvency filings fall at record pace as consumers, businesses cling to government support

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Fewer Canadian consumers and businesses filed for insolvency at the height of the pandemic-induced economic shutdown compared to both the first three months of 2020 and the same period a year ago, according to Office of the Superintendent of Bankruptcy (OSB) data released on Wednesday.?

The number of both consumer and business insolvencies declined by a record amount.

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Consumer insolvencies dropped 42.3 per cent in the second quarter of 2020 compared to the first quarter of the year, and 45.4 per cent from the same period last year, while the number of companies filing proposals or bankruptcies decreased 31.3 per cent compared to the first three months of 2020, and 37.7 per cent from a year ago

At first glance, the data appear to contradict the general economic climate, which has experienced consecutive months of high unemployment, and surges in both the number of small businesses shutting down and large retailers filing for creditor protection.?

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But experts said the sharp insolvency declines are a combination of businesses and consumers being able to delay the bankruptcy process because of the slew of government income support programs keeping them afloat, and because many courts were closed for months, discouraging people from embarking on the insolvency process altogether.?

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“The pressure is off. The collectors are not collecting as much. The courts are essentially closed. If you’re not working, you can’t have your wages garnished. But let’s be clear, many people still have massive amounts of debt,” said Doug Hoyes, co-founder of Hoyes, Michalos & Associates Inc., one of Canada’s largest personal insolvency firms.?

“Collection agents hardly ever sue anybody, even though they always threaten to, but at the moment, I think people realize that’s an idle threat.”

The OSB’s insolvency data track the number of individuals and businesses that file for bankruptcy, or that submit a proposal offering to repay in whole, or in part, the amounts owing to creditors. The data do not track the number of companies that go through the court-driven process of filing for creditor protection or receivership.?

“I’m calling it ‘The Great Pause,'” said André Bolduc, a licensed insolvency trustee and executive board member of The Canadian Association of Insolvency and Restructuring Professionals. “People and businesses are getting a lot of help from the government right now, including mortgage deferrals, so they are just waiting to see how they will fare.”

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Bolduc added that the people he has spoken to who have thought about filing for insolvency have different priorities right now. For example, many have had their kids at home for months.

“The only analogy I can think of is March break, or the Christmas holidays, where we also tend to see a dramatic drop in the number of filings,” he said.

The declining pace of consumer insolvencies seemed to have peaked in May, as the decline in June was significantly lower.

Hoyes said there has been a notable impact on inquiry volume as people return to work.

“As the courts and collection agencies open, we expect insolvencies will gradually return to pre-COVID levels in the coming months, and beyond that number as people deal with the impact of payment deferrals and new debt,” he said.?

Hoyes also believes that the end of the Canada Emergency Response Benefit (CERB) on Sept. 26 could also result in a surge in the number of personal insolvencies as those who might not qualify for employment insurance (but qualified for CERB) struggle to keep up with debt payments.?

On the business front, the number of insolvencies traditionally has not captured the number of small businesses that shut down altogether instead of going down the bankruptcy route.

But Hoyes said the spillover effect of the sheer number of small businesses going under — evident from the latest Statistics Canada data that showed almost 90,000 businesses shut their doors in April — could show up in the number of personal insolvency filings.?

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“I have already talked to two or three people in the restaurant industry who are back to work, but not getting the same income. They are calling me to see what they can do about their debt situation,” he said. “If I had to predict, probably by next spring we will see a sharp increase in insolvencies.”?

Publicly available data from the OSB shows that more than 30 businesses — mainly retailers, cannabis companies and oil and gas firms — since April have been granted protection under the Companies’ Creditors Arrangement Act (CCAA), which allows insolvent companies that owe more than $5 million the ability to restructure their business.?

That number, said David Lewis, also a CAIRP board member who specializes in corporate insolvencies, is much higher than normal.

“The government programs did help a lot of businesses, but, unfortunately, many had major structural issues prior to the pandemic,” he said. “You are probably going to see a lot more troubled entities going forward, until things go back to normal.”?