2020 was record setting for insolvency volumes in Canada.
If you were in the business of insolvency 2020 it was a shocking year. New filings of Canadian insolvency volumes, for the first time in decades, were below the 100,000 benchmark, the incredible data released by the Superintendent of Bankruptcy.
Nationally the total insolvencies were 99,294, a 29.5% decrease over the previous year and a record low for Canada based on all recorded statistics.
Understanding that bankruptcy is the option of last resort, it is considered a lagging economic indicator. Any downturn in general does not create an immediate spike in bankruptcy filings. In other words, insolvency volumes are a reflection of the history of the economy, not an account of today’s economy or tomorrow’s financial outlook.
The early months of the pandemic pushed Canada and much of the world into the largest economic recession since the Great Depression, naturally the position by many industry professionals was that the bankruptcy and insolvency filings would spike in response. Incredibly, the outcome was not a spike in insolvency filings, just the opposite. Insolvencies plummeted!
It is a reasonable assumption that 40,000 to 50,000 additional Canadians would have normally filed insolvency in 2020.
As referenced in the insolvency volumes chart, 2020 was set to out pace 2019 and eclipse the 140,000 annual insolvencies. It is reasonable to assume that 40k to 50k additional Canadians would have normally filed insolvency in 2020. Each of these Canadians had previous negative financial circumstances that have been building for months and years, deeming them to be insolvent. However, it is also reasonable to consider that many of those that were on the brink of insolvency potentially have been thrown a permanent life ring by the federal government.
CERB, CRB and other programs provided income support, corporate and financial institutions allowed further breathing room through collection suspension and payment deferrals. Family expenses in general have also declined due to work from home programs, reduced commuting, eliminated childcare costs and reduced expenditures related to vacations, child sports, almost anything outside the home on which we spent our cash, no longer existed. This multi pronged support system, created an excellent environment to allow people to get their heads above water, breathing room to right their own personal finances.
The outcome is that we had the lowest record of insolvencies in history. The question then becomes, did the Covid 19 response components inadvertently created an unintended consequence with respect to 2020 insolvencies?
Is this an isolated occurrence for 2020 or will there be a hangover with insolvencies remaining abnormally low for the remainder of 2021-22?
LIT’s continue to experience low insolvency volumes for 2021 possibly into 2022.
As announced by the Prime minister on Feb 19 2021, the federal government intends to further extend the recovery time and benefits programs related to Covid19. The CRB and EI recipients will be provided an extension of benefits up to 50 weeks depending on the program. Earlier this year, CRA clarified its position on CERB claw back and gave comfort to Canadians that targeted tax interest relief until April 2022, positively impacting 4.5M low to middle income Canadians.
For now data appears to be pointing 2021 insolvency volumes in a continued downward trend compared to 2019, and it could be another bumpy year for the business of insolvency.