May 5, 2020 | The Great Deferral Period: Calm Before the Bankruptcy Storm

In March, when COVID-19 shutdowns were just starting, 46% of Canadians polled said they were on the brink of insolvency and less than $200 away from not being able to pay all their bills each month (MNP by Ipsos).  Since then, one-third of Canadian workers have applied for government income support and many are unable to make their debt and rent payments.

Lenders, landlords and tax collectors have responded with forbearance:  a temporary postponement of payment and collection efforts.  You can’t collect where there’s no money to be found, and seizing property and equipment when there’s a dearth of buyers is unlikely to yield the quick cash sought.  As a result, payment pressures have subsided and bankruptcy filings have fallen sharply in April.   However, payment deferrals quite literally add up and much of the revenue and income that has been lost, will not be recouped later.

Douglas Hoyes, a licensed insolvency trustee and co-founder of Toronto-based Hoyes, Michalos & Associates points out that the present bankruptcy calm is likely to end as soon as collection efforts resume.  See personal and business bankruptcy surge expected this fall:

“We need one domino to fall. And that may be at the end of August, when the CRA is, in fact, starting to seek payments for income tax or arrears of tax…By the time we get to the fall, the collection agencies are back at work. The banks want their money. The emergency benefits have stopped. So if in September and October, we saw a 20, 30, 40, 50 per cent spike in bankruptcies, that wouldn’t surprise me.”

A similar great deferral period is playing out in small businesses at the moment, even as a third of Canadian owners recently surveyed say they are unlikely to reopen after the shutdown.  Lou Brzezinski, a partner in the Toronto-based legal firm Blaney McMurtry that specializes in business reorganization, insolvency, liquidation and bankruptcy sees lenders ending up with pennies on the dollar and grim prospects for many sectors:

“How many small retail stores, how many restaurants, how much of the hospitality industry has been struck down for good that we will never see again?  I’d say it’s just short of catastrophic…I see the majority of the small businesses not surviving the bankruptcy. I see them ending.”

Danielle Park May 5th, 2020

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