As COVID-19 relief programs wind down, bankruptcies are starting to spike again

After a lull in the early days of COVID-19, more and more Canadians are starting to file for bankruptcy again, and experts in the field say government has to do more and soon or the economy could face a tsunami of insolvencies in the coming months.

The Office of the Superintendent of Bankruptcy Canada reported this week 7,658 Canadians filed insolvencies in September, an increase of almost 19 per cent from the previous month's level and the highest since the COVID-19 pandemic began in March.

Despite the economic hardship that the pandemic has brought, bankruptcy proceedings actually slowed to a crawl for most of 2020 because the unprecedented slew of support programs gave many Canadians a boost to their incomes — and often a temporary respite from their debts, enough to keep their heads above water.

"In the early days of COVID, everything went on pause, including collections," licensed insolvency trustee Andre Bolduc said in an interview. "Finances went on the back burner but things are slowly getting back to the new normal."

The insolvency rate is actually about a third lower than it was this time last year, but experts like Bolduc expect it to multiply over the coming winter months and likely eclipse previous highs. "Before COVID a majority of households were living paycheque to paycheque," he said. "[Their] debts didn't go anywhere, [so] they will still be there after COVID."

Liz Mulholland, CEO of Prosper Canada, a charity dedicated to expanding economic opportunity for Canadians living in poverty, describes the situation as "a slow motion train wreck that's going to unfold over the next six months."

That's because while many parts of Canada's economy have largely recovered, that isn't the case for low-income Canadians, who were the most likely to lose a job to the pandemic and the least likely to have recovered one by now.

While many Canadians have managed to make ends meet, Mulholland estimates that as much as 25 per cent of the population are watching their financial position worsening by the week and "many households are moving inexorably toward that financial cliff of insolvency and they will go over it sometime this winter," she said.

Government programs such as the Canada Emergency Response Benefit (CERB) were a lifeline for many of them, but with that program finished and now transferred into the less generous Canada Recovery Benefit — which is itself set to expire next year — the number of Canadians on a financial knife's edge is set to grow.

Michelle Pommells, CEO of Credit Counselling Canada, says those income support programs certainly helped, as did much publicized mortgage deferral programs that gave roughly one in six Canadian borrowers a temporary reprieve on interest payments. But those programs are also winding down now.

"For families that got into trouble, deferrals have helped but there's no such thing as a free lunch," she said in an interview.

Credit counselling

Pommells says even before the pandemic many people were not taking advantage of credit counselling services that can often help them find a path out of a financial quagmire.

She says the typical person going insolvent tends to have between four and six revolving lines of credit and is often shuffling debt from one into the next. "They are just moving the ball along until finally they can no longer acquire credit and then at that point it's pretty dire," she said. "Every month the pit of debt gets deeper [and it can be] tremendously difficult to get out of."

Insolvencies can take the form of a bankruptcy, where a borrower gets their debt wiped out but at the cost of losing any of their assets — and also find it next to impossible to borrow in the future. Or they can be what's called a proposal to creditors, where the borrower agrees to pay back a portion of what they owe, with the creditor's OK.

Credit counselling aims to give borrowers the tools they need to not slip beneath the waves again. Pommells said the recidivism rate (the number of people who end up going through the process again) is 0.01 per cent. "It works," she said.

Mulholland agrees that a big part of stemming the tide of insolvencies will be credit counselling programs. That's why  she worries about other useful programs that were cut off at the knees by the pandemic.

Beyond the emergency programs created during the pandemic, low income Canadians are at risk of missing out on regular benefit programs because of shutdowns. Nearly three-quarters-of-a-million low income Canadians rely on free tax clinics to file their taxes. About 400,000 did so before lockdowns in March closed them all. A small number have since reopened, but she says it's likely that many people who use them still haven't filed their 2019 taxes yet.

That means 35,000 low-income seniors aren't eligible for the Guaranteed Income Supplement they would otherwise be entitled to. That's up to $917 a month. And the Canada Child Benefit pays out up to $6,000 a year per child to Canadian families, but it too depends on tax filings. Even beyond emergency programs, those two could be "paying rent and putting food on the table," Mulholland said.

It's why Prosper is asking the federal government to restart funding for a whole slew of programs that target those who need it most. Against the backdrop of a $343-billion federal deficit, the ask is a relative pittance — $15 million to help 750,000 Canadians most in need access financial health services they likely already qualify for.

Mulholland says other countries, including the U.K., Australia and New Zealand, have spent far more on similar initiatives, because the cost of inaction far outweighs the cost of the programs themselves.

"If 20 per cent of your population is in this boat, that's a real brake on your recovery [because] there is no consumer confidence. They are not going to be out there spending money," she said.

"As my mother would say, you're being penny wise and pound foolish."