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Come fall, financial experts expect flood of people with unmanageable debt

CERB and payment holidays by mortgage and credit companies are offering some respite, but it will all come to an end
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A record-low number of personal insolvencies during the height of the pandemic in April is expected to later give way to a storm of people seeking help in the fall when they realize they can no longer make ends meet.

“I think with the banks being in co-operation with what’s going on with COVID, there’s not as much urgency to feel that fear that’s coming. The debt is going to come back and hit people pretty hard when it does,” said Katherine Kilner, with licensed insolvency trustees, Harris & Partners Inc., in Barrie, which provides bankruptcy options and consumer proposals.

“We’re expecting a significant increase in the fall.”

In a report earlier this month, Scotiabank indicated new incidences of Candian consumer and business insolvencies plunged in April following a full month of lockdown in most Canadian provinces.  

It attributed those declines to “the unprecedented support measures introduced by all levels of government and private financial institutions, as well as disruptions to the process of insolvency filings due to the COVID-19 shutdowns”.

At the same time, consumer debt loads for the first part of 2020 fell for the first time in more than a decade due to the drop in the use of credit cards, according to credit monitoring firm Equifax.

That trend was particularly noticeable among 18- to 25-year-olds.

Many Canadians are currently relying on the Canada Emergency Response Benefit (CERB) to help them through job losses resulting from the suspension of businesses during the pandemic. They are also taking advantage of payment holidays provided through banks and credit card companies.

But the temporary federal benefit doesn’t necessarily compensate people for all the wages lost. And the ability to skip credit-card and mortgage payments just defers them.

“(The mortgage holiday) doesn’t relieve the interest, it just relieves the payments for now,” said Jean Riddell, a Barrie credit counsellor with the not-for-profit Credit Canada Debt Solutions. “That could be a high-interest payment that you’re adding to your mortgage every month.” 

Most people live paycheque to paycheque, so when a crisis hits they have very little wiggle room, she says.

Riddell suggests that if anyone is or wants to skip payments it’s important to be in touch with their banks and credit-card companies. If not, the missed payment will impact the individual’s personal credit rating.

“Now we’re starting to get busy because people are going back to work and realize, ‘I have to get rid of this debt',” she said.

Threatening letters from creditors are also starting to arrive for those who haven’t made any payments in months without seeking approval from the creditors.

Credit Canada Debt Solutions negotiates with creditors to lower or stop interest and lower monthly payments so people seeking their help can afford to pay off their debts in four or five years or less.

The advantage is the process can wipe out the interest. The disadvantage is that it also wipes out the individual’s credit rating.

Riddell suggests that cutting back on expenses and making at least the minimum monthly payments on debts will keep the credit wolves at bay. But credit counsellors can also help those who see their situation as unmanageable.

Another option is to go to an insolvency trustee who can develop a consumer proposal or bankruptcy.

Key to avoiding trouble, says Kilner, is keeping expenses to needs and not wants and adapting to reduced income levels.

Kilner asks: “How long are the banks willing to put these things on hold?”

Meanwhile, there have been reports that some people’s credit scores are taking a hit even with their creditor’s permission to take a payment holiday. Those who work in the financial industry suggest that anyone concerned about this should check their own credit report to ensure the holiday was confirmed.

Riddell and Kilner both say it’s not too early for those who are unsure about their financial well-being to reach out for an initial basic assessment. Initial consultations are free.

Riddell has already started to see an increase in calls and she expects, come September, she’ll be pretty booked up.

“I think you’re going to get a flood when CERB stops,” said Riddell. “The creditors are all going to say, 'OK, we want our money now'. ... I think it’s coming.”