Looming Insolvency Crisis: 1.3 Million Canadians On The Verge Of Bankruptcy (& How To Avoid It)
May 7th, 2020 by A Licensed Insolvency Trustee
The number of Bankruptcies and Insolvencies will depend on the new normal and how long we take to get there. Our only defence, so far, has been to stay home, social distance, and for all but essential workplaces, to close.
Historically, bankruptcies and insolvencies in Canada approximate 120,000 – 125,000 cases each year. The big question is: “What does the future hold?” People keep talking in terms of months, but in reality, it will probably be more than a year, at the earliest, before we have the tools to defeat COVID-19. Job numbers show that more than a million Canadians lost their jobs in March and another two million in April.
That being said, what does this mean, given that most of Canada’s government support programs are set to run out this summer.
Fundamentally, financial advisors have, for years, been saying that people need to have three months’ income saved as a “rainy-day fund”, in the event of loss of job or income. The vast majority of Canadians don’t even come close to that, and even if they did, it looks like that won’t be enough either!
Bankruptcy, for most, is the last thing they want to do, and they are not going to consider it until they believe they have no other option. Last summer, the average Canadian household debt left Canadians owing $1.78 for every dollar they earned. Under the current circumstances, the compounding effect will be that people are going to be relying on the consumption of their available credit, to the point when it runs out.
Small business and consumer confidence drive the economy. Small businesses themselves are in trouble, and many are not going to be able to reopen. When or if they do, many will find that the reduction in revenues will not allow them to recover their costs. No business, no jobs – no jobs, no business!
Airlines, cruise lines, hotels, and the travel industry will continue to suffer until we have a vaccine, and people are once again comfortable in a large group setting, in confined spaces. The progression to online shopping has been accelerated, and retailers that can adapt will survive, many will not. Resource-based industries and economies that rely on them, will suffer as world oil supply exceeds the new level of demand.
Missing rent and missing mortgage payments only “kicks the can down the road”.
Polls suggest that 4% of Adult Canadians think they are on the verge of filing bankruptcy, many in the next 90 days, and as many as a further 9% suggesting that they are somewhat close to declaring bankruptcy. That translates into more than 1.3 million Canadians on the verge of bankruptcy, and more to come if things don’t turn around soon.
1.3 million people! That is 10 times the annual historical average, and we hope and pray that is not going to be the case. Where does that leave us, and what collateral impact will that have on the creditors who suffer those losses to bankruptcy?
The realistic expectation is that all levels of government are going to have to do more, creditors are going to need to agree to take less, and Canadians are going to need to learn to spend less, if bankruptcy rates are not going to explode.
What Can You Do and How Can You Avoid Bankruptcy?
The Bankruptcy and Insolvency Act, the key word being ‘insolvency’, provides Canadian debtors with another debt relief option.
Once back to work, and you have a steady income, a Consumer Proposal allows you to negotiate new terms with your creditors, and eliminate the interest you have to pay, which is set at an effective rate of Zero percent.
Let’s assume your average credit card interest rate is 19.9%, and, for an example, you owe $35,000.00 on your cards. If you make your minimum payments each month, at an industry standard of 2% per month, your payments will start at $700/month, and reduce each month, but it will take you 112 years to pay it off, and you will incur interest charges exceeding $168,000. Notably, that is only if you don’t use your credit cards ever again! 112 years exceeds a person’s entire life span.
Unlike the previous example, with a Consumer Proposal, at Zero percent interest, you can pay your debt in full, paying only $584/month, or $116/month less, and have it paid off in a reasonable timeframe of five years.
Consumer Proposals are exclusively administered in Canada by Licensed Insolvency Trustees, and they are the only individuals who can provide you with immediate legal protection from your creditors. If you find yourself in financial trouble, speak to a Licensed Insolvency Trustee, who can walk you through your options. Most offer free initial consultations, and it won’t cost you anything to talk to someone and get a better idea where you stand.