Corporate bankruptcies surged more than 41% last year as pandemic debt mounts

Corporate bankruptcies increased by more than 41% in 2023. That’s according to data released Friday by Canada’s top financial regulator.

The number of bankruptcies (meaning the number of cases filed by both businesses and consumers) increased by 23.6% last year, according to a report from the Insolvency Supervisory Authority.

The high rate of corporate bankruptcies “speaks to something that we’ve been a little concerned about, which is essentially that with economic activity down, we’re facing a very tough economic climate for many businesses.” said Pedro Antunes. Chief Economist of the Conference Board of Canada.

“Profits have fallen sharply, and we’re seeing the stress of CEBA loan repayment deadlines and perhaps other stresses also play a role,” he said, adding that more job losses are likely in the coming months. added.

He said the Bank of Canada still has room to lower interest rates if the situation starts to worsen, which would help businesses repay loans and reduce the need for layoffs.

“But we’re at a critical moment. We’re at a moment where everyone is waiting with bated breath to see what’s going to happen,” he said.

The Canadian Association of Insolvency and Restructuring Professionals (CAIRP) said in a statement that Friday’s numbers showed the sharpest increase in corporate bankruptcies in 36 years on record. Analysts had predicted that businesses would be hit hard in 2023 as many companies defaulted on loan repayments due to the pandemic.

Finance Minister Chrystia Freeland said on January 23 that a quarter of small businesses that took out Canada Emergency Business Account (CEBA) loans have missed the January 18 partial forgiveness deadline.

CAIRP Chairman Andre Bolduc said: “Many companies are already on a razor’s edge. The increased cost of debt servicing due to rising interest rates will further reduce the scope to cover rising operating costs in the lead-up to 2024. ” he said.

Cost of living is the main factor

Bankruptcy numbers take into account bankruptcies and creditor proposals. The latter is when the person in debt makes a formal proposal to the creditor asking for alternative arrangements to repay the money owed. You may choose to pay off part of the original debt, negotiate a repayment deadline, or a combination of both.

Richard Goldhar, a licensed bankruptcy trustee who helps clients with such arrangements, says things are busy at his Toronto-based firm.

“Right now, our staff is constantly talking to customers and our phones are ringing all the time,” Goldhar said. His firm files bankruptcy or insolvency proposals on behalf of individuals and businesses and helps them restructure their debts.

Consumer bankruptcies alone rose 23% last year, according to Friday’s report. Goldhaar said the biggest factor in clients filing for bankruptcy is the cost of living.

“It’s just food, car, gas and daily living expenses,” he says.

In addition to these expenses, customers face multiple layers of financial stress due to rising credit card debt, rising costs of payday loans, and rising interest rates when refinancing their mortgages. Goldhar said.

Credit card debt is a particularly important factor, with total balances hitting a record high of $11.34 billion this fall, an increase of 16% from a year ago, according to a December report from credit bureau Equifax. (This figure does not include mortgage debt.)

And while wages are rising, they haven’t kept pace with inflation, forcing people to borrow money while interest rates are still high at 5%.

Goldhar said wages are also contributing to the increase in customer bankruptcies, as employees seek better pay and companies struggle to balance pay increases.

Numbers rebound after pandemic lows

Consumer bankruptcies significantly reduced record low At the beginning of the pandemic, only 6,700 people filed for bankruptcy or filed a creditor proposal in April 2020, a 43% decrease from the previous year.the government had introduced financial supportMortgage payments were deferred.

Anna Rand, an associate professor at the University of Alberta’s faculty of law, said the number of bankruptcies reported Friday is roughly in line with 2019 levels, given the decline in bankruptcies that began in 2020.

“So we’re getting back to where we were before the pandemic.”

Antunes said the low levels of bankruptcy that began during the pandemic “continued to be that way in households until very recently.” Now, the numbers are starting to go up, especially for creditor proposals filed by consumers, which increased by 28.3 percent last year.

“It essentially means that households are caught up in too many problems and are trying to negotiate their way out of a tough situation,” Antunes says.

Lund offered a different explanation for the increase in proposals.

“One of the things people worry about when it comes to bankruptcy is that if people get their debts discharged too easily, they’ll end up filing for bankruptcy when they’re able to pay off some of their taxes.”

As a result, Lund said, “the federal government has expressed some preference for consumer proposals and has included a number of things in the Insolvency and Bankruptcy Code that encourage consumer proposals.”