It may be hard to believe, but Canadian insolvencies dropping from Q1 to Q2 is a reality. But it may not be as positive as it sounds. In this article, we’ll look at the real reasons why.
Government programs and payment deferrals have played a large part. This is despite unemployment reaching a 40 year high. But could trouble be on the horizon? Let’s take a closer look.
The Latest Insolvency Numbers from Q2
The latest numbers of insolvencies dropping from the Office of the Superintendent of Bankruptcy (OSB) shows that total insolvencies dropped from the first quarter of 2020 to the second quarter of 2020 in Canada. Nationally, consumer insolvencies were down sharply by 42.3 percent in Q2 compared to Q1. Insolvencies are also down by 45.4 percent so far in 2020 compared to 2019.
At first glance, this seems like great news. It would appear as though Canadians have been able to weather the Covid-19 storm perfectly fine, but looks can be deceiving. While the numbers of insolvencies may be down, the numbers aren’t a true reflection of how Covid-19 has affected the finances of Canadians.
Government Programs and Payment Deferrals Have Been Helping
Government Programs like the Canada Emergency Response Benefit (CERB) has been putting cash into the hands of Canadians whose income and employment situation has been affected by the Covid-19 pandemic. This has allowed these Canadians to continue to pay their debt and make their mortgage and rent payments.
The banks have also been lenient with debt repayment. Banks had been allowing homeowners to defer their mortgage payments up to six months if they feel as though it’s necessary due to Covid-19.
Government programs and payment deferrals have certainly helped, but those programs and measures won’t last forever.
The pandemic happened with little warning. One moment the economy was open like usual. Next, everything closed. Everything happened so quickly, giving Canadians little time to prepare.
Before the pandemic, Canadians were already dealing with a record level of household debt. That debt hasn’t gone away. Government programs and payment deferrals have only been buying time. It’s akin to kicking the can down the road.
Government programs haven’t just been helping individuals. Government programs have been helping businesses, too. With company wage subsidies and rent relief, the government has been doing everything it can to keep businesses afloat.
Maybe this has helped you hang onto your job during the pandemic, but unless the business has a plan to turn itself around, the company could be in real trouble long term when these shorter-term measures are no longer here.
Unemployment Sharply Up
Unemployment reached its highest level in 40 years during the pandemic. You’d think that Canadians would be filing for insolvency left right and centre, but that hasn’t been the case.
Despite the loss of jobs, when it comes to bankruptcy and insolvency, it takes the average Canadian family a while to recognize just how severe the situation is. There’s often a gap in time between when Canadians understand that there’s a problem and when they do something about it.
Many Canadians struggle for years with debt before finally seeking help. Sometimes the situation is so dire at that point that bankruptcy or a consumer proposal is the only option.
Rather than struggling in silence, you’re better off in most cases seeking financing help immediately. The reason for that is because when you file for insolvency, it offers you protection from creditors who may attempt to take legal action against you to recover the money that is owing to them.
A far better approach is to reach out to the creditor at the first sign of financial difficulty and try to work out a plan. It’s a lot better than ignoring the creditor’s calls and being sent to a collection agency. Hopefully, you can work out a payment arrangement with the creditor. If not, that’s when it can make sense to seek out the assistance of an independent third party like a credit counsellor.
The biggest worry about filing for insolvency is that you’ll lose all your worldly assets like your home and car, when in reality you may be able to hold onto those. You won’t know unless you speak with a licensed insolvency professional.
The Courts Have Been Closed
Another less apparent reason why the filing of insolvencies is down is that the courts are closed. When Covid-19 started, the court system shut down. That means even if you wanted to file for insolvency, you couldn’t.
However, as the courts open up again, expect a sharp uptick in insolvencies. I wouldn’t be surprised to see insolvency filings up in Q3 and sharply up in Q4, presuming government benefits aren’t extended. Other financial experts are voicing this concern as well.
Have your family’s finances been negatively affected by the Covid-19 pandemic? Are you struggling with debt? Don’t struggle in silence for the long term. Whether you’re an individual or a company, we can help.
Reach out to your offices today. We can assist you before the situation gets too bad and help get you on the right financial track.
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