Address
111 Waterloo Street, Suite 310
London, ON N6B 2M4

Insolvency Tsunami

July 24, 2020

A recent article in a local newspaper described a coming insolvency tsunami – which has been anticipated by some colleagues to commence next year.  But in this blog, we provide a counterpoint as to why it probably will not happen.  We anticipate the probability of a slight uptick in filing volumes but not a massive wave of filings.

  1. Consumer insolvency practices service clients from all social stratifications but most are close to or below the median income level.
    1. The median Canadian income is approximately $36,000 – 50% of Canadians earn less than that value.
    1. Low-income earners use credit mostly for living expenses.
    1. Low-income earners typically have higher (interest rate) risk credit – payday loans, etc.
    1. Low-income earners make up 30-60% of insolvency filings for most consumer trustees.
    1. Low-income earners file more bankruptcies and less proposals than high-income earners.
  • High-income earners have more benefits in the credit market
    • High-income earners have access to lower interest credit markets.
    • High-income earners carry higher volumes of debt than lower income earners.
    • High-income earners use credit for more luxury items.
    • High-income earners are more likely to be registered as homeowners.
    • Many homeowners leverage property by consolidating unsecured debt into secured (mortgage) debt, avoiding insolvency.
    • High-income earners have other resources – such as investments to self-liquidate.
  • Creditors are changing strategies
    • Banks recognized the challenges and are negotiating more informal settlements, even on secured debts (car loans).
    • Banks lowered interest rates and deferred payments on credit cards and loans.
    • Banks also negotiated deferred mortgage payment arrangements.
    • Banks are keeping more collection business in house and are less aggressive.
    • Collectors are unable to sue due court shutdowns.
  • Use of credit has changed during the lockdown
    • Malls and shops have been closed or had limited access for consumers.
    • Luxury items have not been available due to store closings and supply chain issues.
    • Shoppers have been far less impulsive than pre-lockdown.
    • Less spending and reduced interest rates allowed consumers to pay down their credit cards more than pre-lockdown.
    • Major purchases (for vehicles and recreational equipment) have been postponed.
  • CERB – Canada Emergency Response Benefit
    • It has been well reported that the CERB was rolled out with no gatekeeper properly checking applications.
    • The media has also reported that a large number of recipients ought not to have qualified for the benefits.
    • Some government benefit administrators have, erroneously, advised benefit recipients to apply for the CERB benefit.
    • A family of four with two teen aged children (aged 15 & 17) would normally get about $2,800 (monthly) on ODSP – but with each family member making a CERB claim their income increased to $10,800 per month.
    • The Trudeau government proposed an omnibus bill (Bill C-17) that could, in effect, criminalize “fraudulent” claims.
    • Under the proposed bill claimants who ought not have qualified for the benefit would have been required to repay three times the amount of benefits received as well as pay taxes, penalties and interest.

Summary:

Many low-income earners, including pensioners, welfare and ODSP recipients had more money than ever before this year.  This has allowed them to pay off payday loans and other forms of credit.  They have effectively removed themselves from the insolvency market.  It will take them several years to get back into trouble, to the point that a bankruptcy filing makes sense. 

We have not seen the housing market correction that was expected, in fact house prices have continued to rise – creating equity that can be leveraged to bridge the gap.  If the Trudeau government is successful in pushing through an amended bill, addressing the CERB overpayment issue, the consequence could be that a bankruptcy will not allow the debt to be discharged.  Should that be the case the government will (eventually) be forced to write off the outstanding amounts since many benefit recipients simply could not afford to repay the obligations. 

For the past decade the media has been reporting an expected wave of insolvency filings as incomes have decreased relative to living costs and the use of credit has continued to balloon unabated.  Last year Canadians charged about $45 billion more on their (bank issued) credit cards than during the previous year.  Yet, the surge never came. 

At this point, many credit cards have been paid down, the poor have been temporarily enriched, and the middle class is liquidating assets, either directly (cashing out RSPs) or indirectly (leveraging equity in real property).  Realistically we will likely see a slight uptick in insolvency filings in 2021 but it seems unlikely that we sill see a significant increase.