The Office of the Superintendent of Bankruptcy Canada recently released its insolvency statistics for the second quarter of 2021. And, again, they go against all expectations.
Remember: in the spring of 2020, as COVID-19 hit the country and the rest of the world, experts were anticipating economic catastrophe, and with good reason. As non-essential businesses closed their doors and most of the population remained locked in their homes, job losses were counted in the hundreds of thousands in Canada.
The economy has improved considerably since then, but the turbulence caused by the pandemic has not finished being felt.
Logically, one would expect to see the number of insolvency cases explode. However, it is quite the opposite which is happening. Bankruptcies and consumer proposals are well below their pre-pandemic level, 35% lower, and there is a decrease of almost 26% in cases for the 12-month period ending June 30 2021. How to explain this disconcerting situation to say the least?
Less expenses, less debt
Pierre Fortin, Licensed Insolvency Trustee and President of Jean Fortin et associés, notes that various factors make it possible to better understand this trend.
The pandemic mainly affected the finances of low-income people who worked in industries such as restaurants, hotels, etc. However, they were able to receive the PKU which, in most cases, represented roughly their net remuneration before the health crisis. As for the better paid jobs in other sectors of activity, they were generally not affected because the employees were able to continue to work remotely and to receive their wages.
In addition, the drop of around 30% in personal spending on outings, leisure, travel, transport, etc., during the long months of confinement has improved our cash flow. Canadian banks have found that they had $ 100 billion more in cash in their coffers than before the pandemic.
Another factor that has given consumers a good financial maneuver: the deferral of payments made by banks on mortgages, car loans, credit cards, etc. As a result, those extra hundreds of dollars have allowed many of us to reduce, if not outright liquidate, our credit card balances.
Pierre Fortin adds that the fall in interest rates has also had a notable impact on consumers who have a home equity line of credit. With a reduction of almost 1%, that can add up to several hundred or even thousands of dollars less to pay off each month. The same goes for those who have an adjustable rate mortgage. Again, these providential sums could have been used to repay credit card balances.
What does the future hold for us? This is still difficult to assess, but it seems unlikely that insolvency cases will return to pre-pandemic levels in the very short term. Things are likely to get tough when interest rates start to rise. With house prices soaring, those who recently untied the purse strings to buy a home will eventually see their mortgage payments soar.
Low-income people who were already heavily in debt before the crisis and who could not take advantage of the ECP respite to pay off their credit card balances will also find the pill hard to swallow. Because, sooner or later, the creditors who have so far been relatively conciliatory will initiate recovery procedures. Be careful, it may shake …
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