It didn’t take long for the economic shutdown due to COVID-19 to impact personal insolvencies in Canada. Even though Canadians continued to carry excessive debt, their financial priorities during the initial stages of the coronavirus were to pay their rent, mortgage, and living expenses. If not working, a debtor was mostly creditor proof. The courts were closed, and people who had been laid off had no income to garnish as CERB payments could not be garnisheed.
During this period we were advising many clients to follow a wait and see scenario.
That holding period is now ending. Ontario began the process of reopening in late May 2020. The process was gradual with Windsor-Essex, the last area entering stage 3 in mid-August.
What does a post-COVID economic recovery mean for those with debts? Who is returning to work, who is not and for how long? What happens when government support payments end? How long will financial institutions forbear calling in all those deferred loan payments?
I don’t have answers to all these questions, but I can present a picture of what we are seeing on the ground right now and what we expect in the coming months.
Table of Contents
Collection actions have resumed
First, clients have reported an uptick in collection calls. Large call centres that were forced to close at the beginning of the crisis have adapted and begun to reopen. Many are now operating with staff social distancing or working from home.
Courts have also begun the process of reopening. While there will be a backlog to deal with, debt collectors can now more realistically threaten a pending wage garnishment or other court action.
The Ontario government has extended the suspension of the Ontario limitation period for lawsuits once again, but it is currently set to expire on September 11, 2020. The practical implication is that debts did not age during this suspension period. This provides an advantage to lenders and collection agencies against borrowers who deferred payments but may never catch up. A debt deferred in March with no further payments, will now not fall outside the limitation period until September 2022 rather than March 2022. A longer limitation window provides a longer period during which the prospective borrower may return to work post-recovery.
While it is possible to file bankruptcy to stop an eviction order, it has not been a common occurrence despite the fact that more the 95% of our clients are renters. Effective August 2020, the Landlord and Tenant Board began to issue pending conviction orders and conducting eviction hearings, making use of videoconferencing and phone calls to deal with the backlog. Again, in practice, we generally do not recommend people file insolvency to deal solely with rent arrears. However, the potential number and length of rent arrears, combined with other debt repayment deferrals as a result of COVID-19, may lead to a jump in rental bankruptcies in the coming year.
Government support payments are ending or transitioning to EI
The financial support offered directly to Canadian households when the pandemic began was unprecedented but has started to wind down.
- CERB – Canada Emergency Response Benefit was extended again but will expire October 3, 2020
- CESB – Canada Emergency Student Benefit provided $1,250 per 4 weeks with the final eligibility period set for August 2 to August 29, 2020.
- EI – the government has reduced eligibility requirements as people transition from CERB to EI
- CRB – Canada Recovery Benefit will provide $400 per week for up to 26 weeks for those not eligible for EI, including self-employed workers.
- CRCB – Canada Recovery Caregiving Benefit will provide $500 per week for 26 weeks per household for parents and caregivers unable to return to work because schools, daycares and disability supports are closed due to COVID-19.
As of August 9, the federal government paid out more than $68 billion in CERB benefits. This is cash flow that kept more than 8.5 million applicants afloat.
CERB will be transitioned to EI and new recovery benefits. The problem for many, however, will be a reduction in benefit amounts. While CERB paid everyone $500 per week, EI is equal to 55% of income, up to a maximum of $573 and the new CRB (for non-EI eligible workers) will only pay $400 per month.
Tax obligations loom
The looming tax obligation for CERB (and CRB) recipients concerns us. CERB is a taxable benefit and, while Canadians have been advised to set aside money to deal with a potential tax bill due to CERB, many will not.
Of more immediate concern is the tax liability faced by self-employed and contract workers who have taken advantage of the CRA payment deadline extension. The deadline for amounts owed on 2019 returns, as well as instalment payments, has been extended to September 30, 2020.
CRA suspended most collection activity during the spring and summer, coinciding with their deferral of filing and installment deadlines. However, CRA is expected to resume collection activity in September.
Roughly 7% of insolvencies in 2019 involved self-employed workers, and 37% of insolvent debtors owed an average of $20,013 in tax debts. While we will not see a significant change in 2020, we do expect to see a dramatic rise in the number of tax insolvencies in 2021.
Employment is still fragile
We’ve seen an uptick in the rate of calls from customer facing, front-line service workers, like hair salon employees, restaurant workers, and fitness instructors. Even though Stage 3 has enabled their businesses or employers to reopen, capacity is limited to 40% to 60% at best. While CEWS (Canada Emergency Wage Subsidy) is intended to help employers retain or rehire employees, it doesn’t help if a business can’t call everyone back to work due to social distancing. For a significant number of service employees, that still means a reduction in hours and income. Even worse, many businesses may not survive the drop in revenue, forcing employees out of work a second time around.
Another common scenario we hear right now is a two-income household suddenly turned into a one-income household, with little to no expectation that the unemployed spouse will return to a previous job any time soon. For those households previously balancing high credit card and consumer debt on two incomes, repayment is now impossible.
Credit card debt maxed out and deferral periods ending
According to TransUnion’s second-quarter Industry Insights Report, 9.2% of Canadians, or 2.6 million people, took advantage of loan deferrals as of the end of June 2020.
While most of the deferrals by dollar value are mortgages (88% of all balances deferred), we are still very concerned with the sheer volume of non-mortgage credit accounts in deferral. This is because bankruptcy deals with unsecured debt.
Almost one-third (32%) of all accounts in deferral were credit cards as of May 2020. TransUnion’s July Financial Hardship Survey reported that 62% of those surveyed continue to be concerned with their ability to pay current bills with credit cards the most likely to miss.
Mortgage, loan, and credit card deferral periods will be ending for most borrowers this fall. Financial institutions will begin to expect repayment or restructuring.
Banks are certainly worried, with the big six already setting aside more the $10 billion in loan loss provisions. Some have even begun to promote ‘debt relief’ options directly to consumers.
— CIBC (@cibc) July 6, 2020
However, don’t expect that a broad-based debt jubilee is coming. Lenders may reach out to high-risk clients or take requests for further forbearance under consideration. Still, their objective will be to postpone losses and write-offs as long as possible, earning as much interest income as they can in the meantime.
We have observed an interesting pattern in the consumer proposals we have filed since the pandemic began. In the early stages, in April and May, creditors, in general, were very reasonable, accepting almost all proposals as filed, presumably because they did not know how long the shut down would last, and “something is better than nothing”. However, during the summer months, I have observed many big creditors becoming more stringent, requesting higher payouts in proposals. We continue to actively engage with all creditors to ensure they fully understand the ongoing hardships many of our clients face, to reach a resolution that is both acceptable to the creditors and affordable for our clients.
Subprime to the rescue?
The last trend that does not surprise us is the increase in subprime borrowing that continues despite, or perhaps because of, the pandemic shutdown.
The trend towards high-cost installment loans as a loan of last resort has been on the rise among insolvent debtors for several years now. Using debt to make ends meet and kick the can down the road is a common avoidance strategy of many indebted consumers.
High-interest rate lenders are very good at managing risk and are more than willing to take on high-risk borrowers, even now.
A $10,000 3-year installment loan at an interest rate of 59% recovers its initial principal outlay in less than 18 months. Any payments after that, plus additional fees, provide a quick return on investment. It’s also not uncommon for a family member to be asked to cosign or guarantee the loan payments.
Consumer debt was in crisis before the coronavirus. We saw the cracks begin to show with 17 consecutive months of year-over-year insolvency increases before the pandemic.
Insolvency professionals are in the protection business. Yes, we provide consumers with debt relief, but the real pressure that prompts a call to our office is creditor actions. As long as people can seem to afford their debt payments, or do not feel obligated to make those payments, insolvencies will remain low.
As we reopen, old pressures return. Collection calls are returning, deferrals will end, payments will resume, and new credit options will be exhausted.
Too much debt leads to bankruptcy, but a catastrophic event triggers it. COVID will be that event for many Canadians – it’s just delayed.