In 2023, business bankruptcies increased by more than 41 percent. That’s according to data released Friday by Canada’s top financial regulator.
A report from the Bankruptcy Comptroller’s Office showed that the total number of bankruptcies, those filed by both businesses and consumers, rose 23.6 percent last year.
Pedro Antunes said the high bankruptcy rates for businesses against a background of low economic activity “tells a story that we are a little worried about, and that is actually we see a very difficult economic climate for many businesses.” Chief Economist, Conference Board of Canada.
“Profits have fallen sharply and we’ve seen the stresses of repaying the CEBA loan and possibly other stresses come into play,” he said, adding that more job losses could be expected in the coming months.
If things start to settle down, he said, there is still room for the Bank of Canada to cut interest rates, which would help businesses pay back their loans and reduce the need for job cuts.
“But we’re in that neighborhood. We’re at a point where everybody’s holding their breath to see what’s going to come of it,” he said.
The Canadian Association of Insolvency and Restructuring Professionals (CAIRP) said in a statement that Friday’s figures marked the sharpest increase in business insolvencies in 36 years of records. Analysts expected businesses to be hit hard in 2023, with many falling behind on pandemic loan payments.
Finance Minister Chrystia Freeland said on Jan. 23 that a quarter of small businesses taking out a Canada Emergency Business Account (CEBA) loan missed the Jan. 18 partial forgiveness deadline.
CAIRP Chairman André Bolduc said, “Many businesses are already on a razor’s edge. The extra cost to service their debt due to high interest rates means less room to cover rising business costs through 2024.”
Cost of living is a major factor
Insolvency figures take into account bankruptcies and proposals from creditors. The latter is when a debtor makes a formal offer to creditors requesting a different arrangement to repay the debt. They can pay a percentage of their original debt or negotiate a repayment period or a combination of both.
Richard Goldhar, a licensed bankruptcy attorney who helps clients with such arrangements, says his Toronto-based firm is busy.
“Our employees are always talking to customers now, the phones are always ringing,” Goldhar said. His firm files for bankruptcy or insolvency on behalf of individuals and businesses, then helps them restructure their debts.
Cost of living4:41 a.mBad business
Consumer bankruptcies alone rose 23 percent last year, according to Friday’s report. Goldhar said cost of living is the top factor leading to personal bankruptcy among his clients.
“Food expenses, car expenses, gas expenses, just everyday living expenses,” he said.
Between those costs, plus mounting credit card debt and mounting payday loans (short-term loans with expensive payments), as well as higher interest rates for those refinancing their mortgages, Goldhar said his clients are facing a lot of financial stress.
Credit card debt is a particularly significant factor, with total balances reaching $11.34 billion in the fall, up 16 percent from the same period last year, according to a December report from credit bureau Equifax. (This figure does not include mortgage debt.)
Numbers are recovering after pandemic lows
Consumer bankruptcies have increased record low at the start of the pandemic, in April 2020, only 6,700 people had filed for bankruptcy or made a creditor offer, down 43 percent from a year earlier. The government submitted Financial supportmortgage payments have been postponed.
“There’s been an extreme increase since the pandemic because during the pandemic … the application numbers were so low that the rise since then sounds crazy,” Goldhar said.
The low bankruptcy levels that began during the pandemic “remained that way for households until very recently,” Antunes said.
Now, the numbers are starting to come in, especially for consumer lender offers, which grew 28.3 percent last year.
“What this means is that actually households have put themselves in a very tight spot and they’re trying to bargain their way out of the tight spot,” Antunes said.
Salary is also a factor. Although wages are rising, they are not keeping up with inflation, forcing people to borrow at interest rates that are still as high as five percent.
Wages are also driving job losses among Goldhar’s clients, he said, as workers demand better wages and businesses struggle to offset those increases.