Canadian insolvencies on the rise

Experts cite increase in interest rates as filings reach second-highest level on record

Canadian consumer insolvencies reached the second-highest level on record in 2019, with experts blaming rising interest rates, which are starting to push a growing number of Canadians with unmanageable debts over the edge.

About 375 Canadians filed a bankruptcy or consumer proposal each day in 2019 — 137,178 Canadians in total — the second-highest number of annual filings ever in Canada, the Office of the Superintendent of Bankruptcy said Monday.

In the final three months of 2019, insolvencies totalled 35,155, the most in any one quarter since 2010. That’s up10.2 per cent compared with 31,900 in the same period a year earlier and is about 5,000 shy of the record 40,589 reached in the third quarter of 2009, according to Bloomberg.

“We saw this coming,” said André Bolduc, a board member with the Canadian Association of Insolvency and Restructuring Professionals (CAIRP).

“The accelerating insolvency rate is a symptom of a bigger problem: many who have amassed unmanageable debts have no path out,” he said. “More and more people are self-employed, which means incomes are variable and when you combine that with the fact there is a lack of savings and rising interest rates, it’s like a perfect storm.”

Interest costs are at the heart of much of what the current numbers tell us about what Canadians are struggling with, said Bolduc, an experienced insolvency adviser. The Bank of Canada’s benchmark overnight rate has been held at 1.75 per cent since October 2018, but in the previous 15 months, it had been raised five times. Between July 2017 and October 2018, it rose from 0.5 to 1.75 per cent.

There is always a lag before those rate increases work their way through the financial system, said Bolduc. Consumers may not feel the impact until a year or two later.

A recent BDO Canada report found that 50 per cent of Canadians are living paycheque to paycheque. That doesn’t leave much wiggle room for dealing with unexpected costs, including rising interest rates, Bolduc said.

“People at lower income levels are more susceptible,” said Bolduc. “We’ve seen a big rise in seniors with debt and those seeking bankruptcy or consumer proposal.”

Though Toronto-specific numbers were not available, Ontario led the way with a 15.4 per cent increase in the number of consumer insolvency filings in 2019, which Bolduc said was a good barometer for how things were in the GTA.

Mitch Stein, assistant professor at Western University’s Ivey School of Business, also said being able to order a meal or any product at a click of button has made it easier for people to pick up bad spending habits.

Experts foresee steady growth in consumer insolvency this year, as many Canadians across the country have amassed unmanageable debt loads.

Adding to the concern is the fact insolvencies are rising at a time when Canada’s economy is doing relatively well, with an unemployment rate that averaged 5.7 per cent in the fourth quarter. When insolvencies peaked a decade earlier, the jobless rate was almost three percentage points higher at 8.6 per cent.

There were some promising signs: the household debt to income ratio edged up to 175.86 in the third-quarter of 2019, but that was below the 2018 record high of 177.82.

“If consumers continue to moderate their spending habits, this should help dampen the rate of increase in consumer insolvency filings,” Bolduc said.

Adjusting the number of insolvencies to account for population growth also shows the increase isn’t as dramatic. As a share of total debt, the rate of filings also appears to be more stable, according to Bloomberg.

In addition, the lion’s share of the increase in the past decade has been socalled consumer proposals, where the debtor agrees with creditors to pay back a proportion of what’s owed. Proposals are considered less severe than bankruptcies, the other form of insolvency reported by the Ottawa-based bankruptcy superintendent.