Canada Insolvency Expected to Rise and Here’s How to Prepare Yourself

With insolvency expected to rise due to COVID-19, Canadians have a lot to think about. If you’re having trouble paying the bills, filing for insolvency may be something you’re considering.

In this article, we’ll look at what is insolvency, why we expect it to rise, and the steps you can take to prepare yourself.

What is Insolvency?

You may often hear the terms “insolvency” and “bankruptcy” used interchangeably. While both terms are related, both have different meanings.

When you’re insolvent, it simply means that you’re unable to meet your debt payments on time. Meanwhile, bankruptcy is a legal process whereby you declare that you’re unable to repay your debt to creditors.

Although filing for bankruptcy is one solution to being insolvent, there are several other possible solutions, including consolidating your debt and making a consumer proposal.

Why Insolvencies are Expected to Rise

It may be hard to believe, but consumer insolvencies actually dropped from Q1 to Q2. You’d think among a global health and financial crisis that insolvencies would sharply rise, but that hasn’t been the case.

Canadian consumer insolvencies dropped 42.3 percent in Q2 compared to Q1. The number of consumer insolvencies is also down 45.4 percent year over year.

A total of 33,227 Canadian consumers filed for insolvencies (bankruptcies and consumer proposals) in the first quarter. According to the latest data, that’s down from 19,160 Canadian consumers filing for insolvencies in the second quarter. (In case you’re wondering, a year earlier that same figure was 35,076 in the second quarter of 2019.)

The CERB

Emergency benefits like the Canada Emergency Response Benefit (CERB) have been helping Canadian stave off insolvency. Although you may not be making as much from the CERB as you were when you had your full-time job, at least it may be enough to keep up with your debt payments.

Low interest rates are helping, too, especially if you have debt that’s tied to prime rate. The Coronavirus means that interest rates are near a record low, making it easier for indebted Canadians to make their payments. Rather than seeing rate increases as many economists had predicted, rates actually declined. This is good news for borrowers.

The courts have also been closed to help stop the spread of COVID-19. Even if you wanted to file for insolvency, you may not have been able to.

All these things combined lead to insolvencies falling in the second quarter of 2020. However, insolvencies have the potential to be higher than expected later on.

This could happen once government benefits run out and the courts open back up. Unless Canadians can land back on their feet and earn similar income to prior to the pandemic, we could see a strong uptick in Canadians filing for insolvencies over the next 12 months and beyond.

We could see a similar increase in business insolvencies as well. This could result in an uptick in unemployment.

CERB Extended Once Again

Canadians relying on the CERB can breathe a sigh of relief. The CERB has been extended once again. The $2,000 a month temporary benefit began in March was only supposed to last for up to 16 weeks. It got a two-month extension in June. The latest extension means that Canadians are now eligible to receive $14,000 from the CERB.

For Canadians struggling with debt, an extension of the CERB is great news, although it’s important to put a long-term plan in place if you’re having difficulty meeting your debt obligations.

Steps to Prepare Your Finances Ahead of Time

Do you anticipate having difficulty making your debt payments in the coming months? Here are some steps you can take now to prepare your finances to avoid being insolvent.

Budgeting

It may sound pretty basic, but if you don’t already have a budget, prepare a budget. A budget makes it a lot easier to keep track of your spending and debt repayment.

There are many ways to create a budget. You can use Microsoft Excel, a budgeting phone app or good old fashioned pen and paper.

Whatever the method you choose, be sure to track your spending. When you do that, you can help ensure that you stay on budget.

Once you figure out where all your money is going, you can allocate a specific amount to go towards debt repayment. This will help ensure you meet your debt obligations and avoid insolvency.

Side Hustle

Budgeting is helpful, but it also helps to bring some extra money in. A simple way to do that is through a side hustle.

If you had a side hustle you were doing before Coronavirus hit, why not look into expanding it? Who knows, maybe you can turn it into a full-time venture. If anything you can earn enough income to pay your bills and keep your head afloat during these tough times.

Retraining

If you worked in the hotel or airline industry and you don’t expect things to pick up anytime soon, you might consider going in for some retraining.

Check into government programs like the Lifelong Learning Program to see if there’s a way you can pay for school without incurring a lot of debt.

Consolidating Debt

If you can qualify, you may look into taking out a debt consolidation loan. This can be a good way to reduce your cash flow requirements and reduce your interest costs.

Clearing up an Insolvency Myth

When you file for bankruptcy, you don’t lose everything contrary to popular belief. You don’t necessarily have to sell the family home. As long as you can keep making the mortgage payments, you may be able to hold onto real estate, even after filing for bankruptcy.

Several other items are also exempt from bankruptcy, including RRSPs, furniture and low-value cars.

By working with a licensed insolvency trustee, he can help guide you through the process . He’ll work with the Office of the Superintendent of Bankruptcy Canada to ensure you’re put in a better financial position post-bankruptcy.

Conclusion

Are you concerned with your family’s finances with insolvency expected to rise? Speak with our trusted experts to help assess your financial situation and put you in better financial shape.

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