The insolvency rate for both businesses and individuals has plummeted recently, but experts fear that bankruptcies will rise once COVID-19 related payment-deferral and financial aid plans come to an end.
According to the latest numbers from Statistics Canada, Ontario’s total insolvencies — a state whereby individuals or companies cannot pay their debts — fell 43.3 per in May 2020, compared to the same month a year earlier; consumer bankruptcies in Ontario were down a whopping 59 per cent over the same time frame.
Across the country it was much the same, with the total number of insolvencies for Canada plummeting 50.3 per cent in May of this year, compared to the same month in 2019.
The numbers may come as a surprise, considering many Ontario businesses had to shut down in mid-March and only some began to re-open in May and June. But the fact that it wasn’t business as usual actually contributed to there being fewer bankruptcies in May.
“The main reason that it’s declined is really primarily due to a lack of enforcement,” said Erez Cukierman, a licensed insolvency trustee and manager for the GTA and Ottawa for FARBER Debt Solutions.
He said financial institutions haven’t been pressuring their clients to pay their debts, and that has helped put off some bankruptcy filings.
As well, many have taken advantage of payment deferral programs and other federal funding programs, which are helping keep some afloat during the pandemic.
“With the introduction of the [Canadian Emergency Response Benefit], it’s been very helpful for people because they now have an income supplement,” said Cukierman.
Good news likely short-lived: bankruptcy experts
While business has been slower in his office in recent weeks, the insolvency trustee believes he’ll get busier when the COVID-19 related funding programs come to an end, possibly in the fall.
“If these programs are no longer available, if people start to enforce [payments], people are going to get very nervous,” said Cukierman.
He also believes that some people may be putting off having the difficult discussion about filing for bankruptcy from their homes, while their children are there.
John Haralovich has similar concerns. A senior vice-president with the accounting firm MNP in Ottawa — where business has declined about 35 per cent overall compared to pre-COVID-19 times — Haralovich says he’s already seeing more consumer bankruptcies being filed.
“The various moratoriums with lenders have basically put a holding pattern on most corporate filings,” he said. But when those programs end, he suspects he’ll be getting more calls from companies, as well as individuals, who are insolvent.
“Once those programs move away, and traffic to [companies’] locations is reduced, there obviously will be less revenue coming in their doors, they will be more likely to consider a bankruptcy” or a corporate restructuring, said Haralovich.
Tread carefully, say experts
Cukierman also worries what will happen to consumers’ personal finances in the years to come. A bankruptcy stays on your credit rating for seven years after discharge. That makes it harder for consumers to access credit in the future.
“They’re going to be dealing with sub-prime lenders and paying much higher interest rates,” he said.
Haralovich’s advises that, as consumers and companies wait for news about whether government programs will end in the fall, they tighten the purse strings even more.
“Don’t overreach, don’t overspend and [don’t] make yourself commit to the long term contracts. I think we all have to wait and see what industries across the country are going to do and how … governments are going to support a reopening.”