The number of businesses filing bankruptcies and proposals rose 37 per cent in September compared with last year, the government reported.Tijana Martin/The Canadian Press
During the pandemic, the number of consumer insolvencies fell dramatically as governments flooded households with billions of dollars in emergency funds. The latest insolvency figures suggest the financial cushions built up over the past two years are quickly eroding in the face of high inflation and fast-rising interest rates.
Consumer insolvencies jumped 22.1 per cent in September from a year earlier, according to new federal government figures. In total, there were close to 9,500 consumer insolvencies compared with 7,700 in September, 2021, the Office of the Superintendent of Bankruptcy Canada reported.
On a quarterly basis, consumer insolvencies jumped 22.5 per cent in the third quarter. That was the fastest increase in 13 years.
The figures include both personal bankruptcies and consumer proposals, in which negotiated deals with creditors are struck, with the latter accounting for close to three-quarters of all consumer insolvencies.
“The concern is that more Canadians are reaching their breaking point financially,” insolvency trustee André Bolduc, vice-president of the Canadian Association of Insolvency and Restructuring Professionals, said in a statement.
The picture was even worse for business insolvencies, with the number of businesses filing bankruptcies and proposals rising 37 per cent in September compared with last year, the government reported.
The jump in September was just the latest in a string of annual increases in consumer insolvencies after an extended period during the pandemic when bankruptcies and proposals declined. Households accumulated an estimated $300-billion in excess savings during the pandemic, while house prices soared, leaving many Canadians in a surprisingly strong financial position given the devastation COVID-19 wrought on the economy.
Despite the severity of the year-over-year increase in September, consumer insolvencies are still roughly 23-per-cent lower than where they were in September, 2019.
Even so, the situation is expected to continue to deteriorate in the coming months.
“We are very early in the cycle,” said Doug Hoyes, head of personal bankruptcy trustee firm Hoyes, Michalos & Associates Inc. “The pressure is going to get progressively worse with each passing month.”
One source of pressure is coming from the Bank of Canada, which has raised its policy interest rate at the fastest pace in decades. Last month, the bank hiked its target for the overnight rate yet again to 3.75 per cent, up from 0.25 per cent at the start of March.
“Consumer insolvencies are still very low due to low joblessness and past savings, but they are trending in the wrong direction, up, due to growing strains on household budgets from high inflation and fast-rising credit costs,” said Sal Guatieri, senior economist at BMO Capital Markets. “That’s something the Bank of Canada could be mindful of now that policy rates are in the restrictive zone.”
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Mr. Hoyes said pressure on households could come from other areas too.
Earlier this year, the Canada Revenue Agency issued notices to more than 1.5 million Canadians advising them they must repay some or all of the Canada Emergency Response Benefit (CERB) payments they received during the pandemic. However Mr. Hoyes said the agency has only conducted “soft collections” so far, and has yet to take the step of freezing bank accounts and garnishing wages. He expects that to change.
If the economy deteriorates and unemployment begins to rise, Canadians will also find it more difficult to keep up with payments on the mountain of debt they’re carrying, Mr. Hoyes said.
According to a report last week by Equifax Canada, credit-card use has risen steadily over the past six quarters with the average balance now standing at a record high of $2,121 as of the end of September. Total average non-mortgage debt per consumer now stands at roughly $21,200, a level not seen since the first quarter of 2020 when the COVID-19 pandemic began
Lastly Mr. Hoyes sees Canada’s fragile housing market as a weak link that could push households into financial difficulty. So far, his firm has seen almost no one who owns a home seek its credit counselling services, but he said that will change as mortgage rates rise and homeowners with variable rate mortgages face trigger rates, the point at which lenders may hike a borrower’s payment amount.
“That might not be until next spring or summer, but it’s coming,” he said.