August bankruptcy filings down 42% from 2019 — but they could rise this fall

Bankruptcy filings have plunged compared to a year ago — but experts expect uncertainty ahead as government supports end and deferred payments come due.

The Office of the Superintendent of Bankruptcy Canada says the total number of insolvencies in August 2020 fell 42.4 per cent compared with August 2019.

About 42.7 per cent fewer consumers filed, while business insolvencies decreased by 25.5 per cent, according to the Sept. 28 data. The data does not include filings under the Companies’ Creditors Arrangement Act, which has been used for creditor protection this year by companies such as Mountain Equipment Co-operative, Groupe Dynamite, David’s Tea and Reitmans Ltd.

Despite the drop, a wave of consumer insolvencies could come later this year,says Keith Emery, co-CEO at Credit Canada Debt Solutions, a non-profit credit counsellor.

“Those year-over-year reductions in consumer insolvencies — in our estimation, that doesn’t reflect that those people are no longer insolvent. Those insolvencies are just not being processed,” says Emery.

“So those people are essentially sitting in the wings … they haven’t dealt with the underlying debt.”

The decline comes as many people are still jobless after the COVID-19 lockdown doubled the unemployment rate between February and May. But government supports, such as debt payment deferrals and Canada Emergency Response Benefit have kept household budgets on balance, says Emery.

As of Sept. 4, there were more than 771,000 mortgage deferrals, 128,000 loan payment deferrals, 124,000 line of credit deferrals, 618,000 credit card payment deferrals and 307,000 auto loan payment deferrals approved in Canada, according to the Financial Consumer Agency of Canada.

Some of those supports are now winding down. Payments resumed on Oct. 1 for Canada Student Loans, after a six month freeze. CERB is over, and its recipients are trying to transition to new programs.

“There’s a hidden story inside of that lower number [of insolvencies]. And we’re seeing it across the industry, we’ve been talking about it in the industry, quite extensively. It’s called the deferral cliff,” says Emery.

If deferrals and income supports wrap up near-simultaneously, it could cause a “massive reversal” in insolvency trends, Emery says. Workers may be supplementing a gap between their income and expenses by borrowing, only to find they hit their limits.