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Before COVID-19, consumer debt in Canada was near all-time high levels, yet national data shows insolvency is down across the board this June compared to last.
It might seem counterintuitive, but Credit Canada CEO Keith Emery says it’s not entirely unpredictable: at the pandemic’s outset, consumers were granted temporary deferrals on payments and mortgages, while government assistance programs like the Canada Emergency Response Benefit (CERB) have given them a lifeline.
Emery says this has created within consumers and businesses an illusory confidence — a temporary reprieve from the realities of debt. But what happens when the lifelines are cut short and the debt holiday abruptly ends?
"I think there’s a growing sentiment that we’ll see a slingshot effect, when the CERB payments stop and payment deferrals do too," Emery said. "Some people are calling it a deferral cliff," he added, and many Canadians are approaching the edge.
“Some people are calling it a deferral cliff.” – Credit Canada CEO Keith Emery
While there’s some speculation government assistance could continue beyond the fall, the CERB program is set to end in October, roughly around the same point many six-month deferrals are set to expire.
In Manitoba, data from the office of the Superintendent of Bankruptcy Canada show consumer insolvencies decreased 30 per cent this June compared to June 2019. The national decrease was even more precipitous at 42 per cent. At the same time, delinquency rates for credit decreased.
But, Emery says, there is an anticipation that after the dip will come a massive spike — with thousands of Canadians clamouring to deal with it at once as creditors resume normal activity and begin calling for payments, if they haven’t done so already.
He said that as "normal" business continues, consumers will have to prepare to pay, and creditors will have to be creative and flexible in their reintroduction to payments.
“There’s been a temporary debt holiday, but that’s going to end before COVID ends.” – Credit Canada CEO Keith Emery
"There’s been a temporary debt holiday, but that’s going to end before COVID ends," he said. "For creditors, policy-makers and consumers themselves, the impetus is there to figure out how we can manage consumer debt and keep a healthy consumer."
Credit Canada also recently conducted a financial poll of 1,500 Canadians to assess spending and credit habits, and Emery said, "What we found in terms of consumer sentiment told the story behind the drop in insolvency."
In Manitoba and Saskatchewan, results showed that only about one quarter of respondents felt paying debt was a priority. Instead, most consumers put an emphasis on other habits associated with what Emery called "survival mode": paying bills (48 per cent), reducing spending (40 per cent) and having a positive bank account balance at the end of the month (31 per cent) were more important to respondents.
While those tendencies make sense, Emery said it’s also imperative that those with debt understand payments will be required sooner rather than later, and with interest.
“It’s going to be a double–whammy. Summer will end, and the debts will come.” – Credit Canada CEO Keith Emery
Before COVID, he said, the debt-to-income ratio hovered around 175 per cent, meaning consumers owed about $1.77 per dollar earned at that moment in time. The ratio is a measure that compares monthly debt payment allocation to monthly gross income.
"There is talk that when the dust settles, we could be looking at 220 per cent," he said.
A lot of that is mortgage debt, he said, but there is a good deal of high-interest consumer debt as well. It will be important that consumers tackle high-interest debt now, if they haven’t already done so.
Emery said that there’s anticipation some deferrals will end in September.
"It’s going to be a double-whammy," he said. "Summer will end, and the debts will come."
Ben Waldman covers a little bit of everything for the Free Press.
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