Insolvencies in Canada are rising on the back of the pandemic as high inflation and interest payments bite

During the pandemic, consumer defaults fell dramatically as governments flooded households with billions of dollars in emergency funds. The latest default figures suggest that the financial cushions built up over the past two years are rapidly eroding due to high inflation and rapidly rising interest rates.

In September, consumer defaults increased by 22.1 percent year-on-year, according to new figures from the federal government. In total, there were nearly 9,500 consumer defaults, up from 7,700 in September 2021, the Canadian Banking Regulatory Commission reported.

Consumer defaults increased by 22.5 percent quarter-on-quarter in the third quarter. It was the fastest growth in 13 years.

The numbers include both private bankruptcies and consumer proposals, which enter into negotiated agreements with creditors, with the latter accounting for nearly three-quarters of all consumer insolvencies.

“The concern is that more and more Canadians are reaching their breaking point financially,” insolvency practitioner André Bolduc, vice-president of the Canadian Association of Insolvency and Restructuring Professionals, said in a statement.

The situation was even worse with regard to company insolvency situations, as the number of companies that applied for bankruptcy and petitions increased by 37 percent in September compared to last year, the government reports.

The jump in September was the latest in a year-over-year increase in consumer defaults after a prolonged period of the pandemic when bankruptcies and filings declined. Households amassed an estimated $300 billion in extra savings during the pandemic, while home prices rose, leaving many Canadians in a surprisingly strong financial position given the economic devastation caused by COVID-19.

Despite the harshness of September’s annual growth, consumer defaults are still around 23 percent lower than in September 2019.

Nevertheless, the situation is expected to continue to deteriorate in the coming months.

“We’re in the very early stages,” said Doug Hoyes, president of personal bankruptcy management firm Hoyes, Michalos & Associates Inc. “The pressure gets progressively worse every month.”

One source of pressure comes from the Bank of Canada, which has raised its key interest rate at the fastest rate in decades. Last month, the bank raised its overnight interest rate target again to 3.75 percent, after it was 0.25 percent at the beginning of March.

“Consumer defaults remain very low due to low unemployment and past savings, but they are heading in the wrong direction, upwards, as high inflation and rapidly rising credit costs strain household budgets,” said senior economist Sal Guatieri. at BMO Capital Markets. “That’s something the Bank of Canada could be aware of now that policy rates are in the bounds zone.”

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Mr. Hoyes said pressure on households could also come from other areas.

Earlier this year, the Canada Revenue Agency sent more than 1.5 million Canadians notices asking them to pay back some or all of the Canada Emergency Relief Benefit (CERB) payments they received during the pandemic. However, Mr Hoyes said the agency had so far carried out only “soft customs” and had not yet taken action to freeze bank accounts and garnish wages. He expects the situation to change.

If the economy weakens and unemployment starts to rise, it will also be harder for Canadians to keep up with payments on the mountain of debt they carry, Mr. Hoyes said.

According to a report released last week by Equifax Canada, credit card usage has grown steadily over the past six quarters, with the average balance now at a record high of $2,121 at the end of September. Average non-mortgage debt per consumer is now about $21,200, a level not seen since the first quarter of 2020, when the COVID-19 pandemic began.

Finally, Mr. Hoyes sees Canada’s fragile housing market as a weak link that could push households into financial trouble. So far, his company has seen almost no homeowners seek its credit counseling services, but he said that will change as mortgage rates rise and mortgage origination rates threaten variable-rate mortgages, allowing lenders to raise borrowers’ fees. amount.

“It might not happen until next spring or summer, but it’s coming,” he said.