Insolvency Statistics: The Impact of the COVID-19 Pandemic on Bankruptcy & Consumer Proposal Filings

What is more unexpected than a pandemic? Scientists have long known that a pandemic could occur at any time, and were aware that certain modern conditions favoured one. However, the economic community and ordinary consumers were caught by surprise when COVID-19 reached pandemic proportions in early 2020.

With that sense of surprise came several circumstances that influenced consumer insolvency rates.

Bankruptcy and Consumer Proposal During COVID-19 – A Look at the Statistics

The COVID-19 pandemic was declared by the World Health Organization on March 11, 2020, several weeks after being classified as a Public Health Emergency of International Concern. As the pandemic influenced most of 2020, insolvency statistics for 2019 make for an apt comparison.

IN CANADA	2019	2020	% Difference
Consumer Proposals	82,769	63,578	-23.18%
Consumer Bankruptcies	54,409	32,880	-39.57%

Source: Office of the Superintendent of Bankruptcy Canada

Yes, you are reading it correctly: both consumer proposals and consumer bankruptcies actually declined in Canada in 2020. How can this be?

Experts have debated this, and there is consensus on one point: many consumers have yet to come to grips with what has happened in the last year and a half.

The Surprise: A Decrease in Consumer Insolvencies in 2020

Surely consumers were under increased stress in 2020 – so, why do the statistics show fewer consumer insolvencies? The answer has several parts:

1. Consumers were under an array of new stressors, so decisions around financial stress may have been deferred. Concern over household finances had to take a back seat to more pressing concerns during the height of the pandemic, including: relationship stress made worse by being home-bound, social stress from isolation, health concerns (including anxiety over catching COVID-19), and stress caused by school closings. If there was any way to construct a financial  “bridge” while money was tight, most consumers would have taken that route rather than confronting their financial issues head-on.
2. Consumers and small-business owners made use of government financial relief measures. The CERB (which, significantly, cannot be garnished) was essential to many individuals and families in 2020. For some, it formed the backbone of their income. Measures to assist small businesses may also have clouded chronic financial problems, allowing business owners to frame them (hopefully) as “COVID-related” issues. The truth will only come to light as COVID-19 business restrictions are eased. 
3. Utility companies and banks offered payment deferrals. Similar to point 2, this factor relieved immediate financial stress, but may promote a delayed “reckoning” when the pandemic comes to a close.
4. Everything was closed – no courts, no new debt collections. If you became insolvent in 2020, in many cases it would have been impractical or impossible to file a consumer proposal or a bankruptcy. Consumers in financial distress were advised to see to their families’ immediate needs using the assistance available, and deal with their debt once the COVID crisis was over.

Cause & Effect: Short-term Effects of the COVID-19 Pandemic on Consumer Insolvency

The numbers above demonstrate the surprising picture of Canadian consumer insolvency rates during the COVID-19 pandemic. In 2020, consumer insolvency, as demonstrated by the combined filing statistics of personal bankruptcy and consumer proposal, declined.

However, the statistic itself may be misleading. Certainly many Canadians faced insolvency in 2020, or may become insolvent in 2021, due to the effects of COVID-19 on business and employment prospects.

COVID-19 Compared to the Great Recession: the Stock Market Tumble

As the Great Recession took shape in 2008 (having begun in December 2007), stock market values tumbled and remained stubbornly low. The sharp tumble put a chill on all consumer business: even the relatively affluent felt reluctant to spend as they saw their investments and retirement funds diminish in value, and remain diminished. Business was suppressed and unemployment rose. Canadian personal bankruptcy and consumer proposal rates began to climb sharply, and insolvency rates stayed high for two years before beginning to decline, slightly in 2012 (and increasing slightly in 2013). The Great Recession had a long shadow: the Dow Jones index did not recover its previous value until the summer of 2013.

When the financial world realized that COVID-19 was shutting business down in March of 2020, the markets again tumbled sharply, having already suffered various blows at the end of 2019 as crude oil values teetered. However, in this instance markets soon began to rise once more, fuelled in part by speculation on what this crisis signified for the financial world. 

The trickle-down effect (less spending) on many small and medium businesses has been briefer and less detrimental during the COVID-19 pandemic than it was in the Great Recession. Because many such businesses are sole proprietorships or small partnerships, their failure will influence consumer insolvency rates rather than business bankruptcy rates. As we have seen, consumer insolvency rates have not climbed in 2020.

Cause & Effect: Long-term Pandemic Effects on Bankruptcy and Consumer Proposal

Although the COVID-19 pandemic did not increase consumer insolvency in 2020, might we yet see a rise in insolvency rates, as consumers come to terms with financial maneuvers undertaken during those lean months? Without a crystal ball, it is impossible to know – but there are several factors to consider.

Before the COVID-19 pandemic, consumer insolvency rates in Canada had already been rising for more than a year. Therefore, we know that the decrease in consumer insolvencies during the pandemic was certainly not a sign that personal finances had improved.

COVID-19 and Online Purchasing – Another Surprise

The image of a consumer in his or her pajamas, bathed in the blue light of their laptop screen and clutching a credit card is almost a signature of the COVID-19 months. Enforced isolation, fear of infection, a need to cheer oneself up by buying – all these conditions caused a surge in online purchasing. Anyone who was accustomed to using cash (and using the thickness of their wallet to keep track of their spending) had to change their buying and spending habits radically. 

Cash use was admittedly on the wane before COVID-19. However, online buying surged in 2020 as brick & mortar stores closed their doors or limited their capacity. Online buying often necessitates credit card use.

A known sign of consumer financial distress is the practice of paying for essentials such as groceries on a credit card. This habit has been seen as both a cause and an effect of insolvency. But during the COVID-19 pandemic and the surge in online purchasing and payment, the credit card was king. VISA and MasterCard certainly benefitted – but what of the consumer? Pre-paying and picking up groceries is certainly convenient (and may decrease impulse buying) – but a rising credit card balance can be insidious.

Canadian Credit Card Debt at a Six-Year Low

Here we encounter another surprise. In January 2021, Equifax reported that Canadian credit card debt was at a six-year low and that payments into credit cards were currently exceeding purchases. 

Although online spending opportunities increased during the pandemic, it is apparent that the restriction of many discretionary spending opportunities (on vacation travel, luxury items in showrooms, etc.) led to less net spending – and less consumer debt.

Equifax warns, however, that the pandemic’s detrimental effects on small & medium-size businesses have yet to play out. Persons whose livelihood depends on these businesses are still vulnerable to insolvency.

COVID-19 and Insolvency – Where Do You Fit In?

The COVID-19 pandemic’s effects on Canadian consumers fell into two rough categories: dire, or little effect at all. Into the second group fall those whose employment was not affected by the pandemic. Information workers and many employees of government and institutions belong to this group, as do certain entrepreneurs.

Let us continue to explore the pandemic’s effect on the first group – those who may have become unemployed.

Unemployment and Low Income During the COVID-19 Pandemic

Into the first group, which has experienced dire financial effects, fall those whose employment was quickly reduced or terminated when COVID-19 caused the closure of retail storefronts and restaurants. Some consumers with manufacturing jobs also felt the pinch, as orders for showroom goods faltered. Unemployment in certain sectors soared.

If you became unemployed or experienced reduced employment hours during the pandemic, you may have received the CERB for a large part of 2020. The CERB, although not lavish, was pivotal for many individuals and families struggling to stay financially afloat with reduced income.

Now, as pandemic restrictions ease in 2021, the question is: where do you find yourself, financially? The CERB made a difference, but did not cover everything – especially for those whose employment was completely terminated (or paused) in 2020. With little or no income, many have turned to credit cards to bridge the gap. You may be among them.

Has your employment returned, or have you found new employment? Canada’s unemployment rate sat at 5.6% in January 2020, peaked at 13.7% in May 2020, and still sat at 8.1% in April 2021. Although the unemployment rate continues to decline, over 700,000 Canadians who lost their employment in 2020 still have had no opportunity to begin their financial recovery.

If this is your situation, you may need to find insolvency solutions in the near term, before you regain your employment.

Are You Considering Bankruptcy Due to the COVID-19 Pandemic?

As we move through 2021, many Canadian consumers will be assessing their financial situations, and some will require debt relief. This situation is difficult to face, but help is available, even for the most difficult scenarios.

You may never have expected to become insolvent (unable to pay your bills as they come due) or to be considering bankruptcy. Under normal circumstances, as a responsible consumer you may never have overextended your finances.

However, the COVID-19 pandemic changed that for tens of thousands of Canadian consumers. You are not alone!

Personal bankruptcy is an insolvency solution designed to give a debtor a fresh start. You qualify to file for bankruptcy if your combined unsecured debts total more than $1,000, your assets are worth less than your debts, and you cannot pay bills as they come due. Examples of unsecured debt include credit cards, store cards, and payday loans. (Secured debts include mortgages and car leases, where the loan is secured by collateral).

To initiate the process of filing for bankruptcy in Canada, contact a Licensed Insolvency Trustee. A Licensed Insolvency Trustee is the only professional authorized to file your bankruptcy paperwork with the Office of the Superintendent of Bankruptcy Canada.

Consumer Proposal – A Bankruptcy Alternative

If you have realized that you need an insolvency solution, but you have regained or maintained your employment, filing a consumer proposal may be a practical alternative to filing for bankruptcy. 

A Consumer proposal is not another form of bankruptcy. It is a distinct insolvency solution. Your creditors must agree to accept your proposal, whereas in a bankruptcy they have no choice but to accept. Thus, consumer proposals are easier on creditors, and allows a consumer to pay back as much as possible of their debt.

To accomplish this, in a typical consumer proposal, the debtor makes monthly payments for up to five years. Similar to a bankruptcy, a consumer proposal must be administered by a Licensed Insolvency Trustee. The Trustee’s fees and payments to the creditors are covered in your monthly payments.

Creditors favour consumer proposals (and accept the majority of them) because they receive more funds than if their customer filed for bankruptcy; consumers favour consumer proposals because they maintain control of their assets, and rarely have to liquidate their homes.

Next Steps – Where to Find Help

If you have been impacted by the COVID-19 pandemic and are struggling financially, contact a Licensed Insolvency Trustee.  

With the information provided by the Trustee, you will see the way forward to a better financial future. Your first meeting is free, confidential and no-obligation. Fill in the form and get in touch with a Licensed Insolvency Trustee in your area.