Bankruptcies are expected to heat up as aid expires
Filings dropped 38.7 per cent in April, but experts predict a surge in the months to come
Consumer and business insolvency filings declined sharply in April according to the Office of the Superintendent of Bankruptcy as activity in the sector took a pause along with large swaths of the economy.
“It doesn’t make a lot of sense to engage in something you can’t complete,” said Scott Terrio, manager of consumer insolvency at insolvency trustee Hoyes, Michalos & Associates, referring to the impacts of government imposed business lockdowns that began in midMarch to slow the spread of COVID-19.
Terrio also noted that the drop in filings occurred as millions of workers furloughed due to the lockdowns were awaiting an indication as to whether their employer would survive the disruption and be able to recall staff.
“It might simply be that people and firms in difficulty decided to wait to see what government aid might be forthcoming,” said Stephen Gordon, an economics professor at Quebec City’s Université Laval.
“I get the impression that bankruptcies are a lagging indicator, so the bad news might not come for a few months yet.”
According to the latest data from the Office of the Superintendent of Bankruptcy, insolvency filings including bankruptcies and consumer debt restructuring proposals dropped by 38.7 per cent in April versus March, with bankruptcies down 41.5 per cent (55.5 per cent year over year) and proposals declining by 37.2 per cent. The declines follow a run up in consumer insolvencies in 2019 amid record levels of household debt and low savings.
Terrio said he expects a surge in filings once temporary government funded income replacement programs expire.
But Tal Schwartz, head of strategy at the Canadian Lenders Association, said many lenders have been working with troubled debtors toward some sort of mutually beneficial agreement to try and avoid the step.
He added that government funded emergency assistance programs to businesses have been “incredibly helpful,” while economists note that debt deferral on mortgages and discounted interest rates and deferrals on consumer credit during the pandemic have significantly lowered debt servicing costs, at least temporarily.
Still, according to Deloitte Canada chief economist Craig Alexander, it’s
inevitable that proposals followed by bankruptcy filings will rise once support programs expire and as many consumers and businesses that entered the crisis already heavily indebted have been forced to take on even more credit.
“This is the calm before the storm,” Alexander said. “The question is not whether proposals and bankruptcy filings will rise. The question is by how much.” A great deal depends on the strength of the economic recovery even as COVID-19 remains a threat, he added.
The Superintendent of Bankruptcy statistics show the total number of insolvencies in the 12-month period ended April 30 increased by 3.5 per cent versus a year earlier led by a 12.5 per cent jump in consumer proposals. Business insolvencies were down by 8.1 per cent over the same period.
In April, 164 businesses filed for insolvency in Canada, down from 251in March and a decline of more than 54 per cent from April 2019, the Industry Canada agency said. In May, companies filing for CCAA protection included retailers Reitmans (Canada) Ltd. and Aldo Group Inc. and cannabis company Green Growth Brands Inc.