Insolvencies on the rise – what should you do if you think you may be insolvent?

Posted on 18 October 2023

Written by Alan Spergel

Canada’s economic landscape has been hit by a number of challenges over the last few years. Not only has the global pandemic affected individuals and businesses, international wars have also placed pressure on the country, and contributed to a number of financial challenges. A rising cost of living and multiple increases in interest rates have meant that most households are being squeezed in a way that they might not have before. Unfortunately, more individuals and corporations facing financial hardship is leading to the number of insolvencies on the rise across Canada. According to recent statistics published by the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), consumer insolvencies were up 23.5% in Q2 of 2023 with no signs of slowing down.

In this article, we explore why this increase may be the case; what insolvency truly means; signs you might be insolvent; and most importantly, what to do if you think you might be insolvent.

What is insolvency? 

Insolvency is the term used to describe an individual or entity’s situation when they are unable to repay their debts or meet their financial obligations as they become due. It occurs when your total debts outweigh the value of your total assets, and you find yourself struggling to pay your debts on time. Many Canadians often mistake insolvency for bankruptcy, but the two are very different. While insolvency is the state of being unable to meet your debt obligations, bankruptcy is a legal form of debt relief intended to free Candians of their debt and put an end to their insolvency. Learn more in our article on insolvency vs bankruptcy, where we outline the key differences between the two.

How does insolvency work in Canada?

If an individual or entity finds themselves in an insolvent state, this can lead to insolvency proceedings. This is when legal action is taken against the insolvent party, and their assets may be liquidated in order to go towards the repayment of the overdue debts. Where businesses are concerned, business owners may be able to contact their creditors directly to restructure their debts into more management repayment plans. Creditors will often agree as they would rather gain their repayments over making a loss. The same can happen with individuals. Some creditors may be open to negotiations or adjustments to repayment plans – often these are more likely to be agreed with the support of a Licensed Insolvency Trustee to mediate the process.

What are the signs of insolvency?

If you are facing financlal difficulty, you might be reading this and wondering if you are insolvent. Although you might be, there are some important differentiations between insolvency and struggling with your finances momentarily. A potential insolvency might be indicated via the following signs:

  • You are finding it difficult to pay your bills each month – this includes rent, your mortgage, utility bills or all three.
  • Relying heavily on credit cards or loans for everyday essentials like groceries or commuting. 
  • Making late payments or defaulting on loans. If you find yourself frequently missing payments when they are due or defaulting on loans, it could be a sign of insolvency.
  • Using new credit repay debts. Perhaps you feel that the only way to repay your existing debt is to borrow more, and you have found yourself in a debt cycle.
  • Maxing out your credit cards. A high credit utilization ratio often suggests spending beyond your means, and could signal financial difficulty and potential insolvency.
  • Not being able to make more than the minimum payment when repaying debts.
  • Having debts that are worth over 40% of your monthly gross income.

Yet another red flag is your total debt. If your debt payments represent more than 40 per cent of your gross monthly income, you are courting financial trouble, Snedden says. “Canadians renewing their mortgages in 2023 will be facing fixed rates around five to seven per cent, which means a lot of people will no longer be able to afford the current debt they are carrying.”

Feel like a couple of these signs are familiar, but unsure whether or not you might be insolvent? Discover more on recognizing the signs of insolvency. We recommend speaking to one of our experienced Licensed Insolvency Trustees. In a free, no-obligation consultation, we can review your financial circumstances, help you to understand if you are insolvent, and advise you on your options. 

Why are insolvencies on the rise?

For consumers, there are a few reasons why insolvencies have likely increased in recent times. According to CAIRP, consumer insolvencies increased by 23.5% in Q2 of this year compared to the same period last year, equating to 343 Canadians filing insolvency each day. There are a few likely factors for this:

  • Inflation 
  • Fast growing costs of carrying debt
  • Increased levels of borrowing
  • Rising interest rates
  • A lack of emergency funds
  • Job loss

Each of these variables is essentially pushing more and more Canadians to file insolvency and look towards debt relief options to either reduce or eliminate their debt completely. A combination of these factors is making it increasingly challenging for individuals to manage their debt and financial obligations – all while paying more for their debt. 

What to do if you think you might be insolvent

At Spergel, there are a few key steps we recommend you take should you be worried you might be insolvent. Firstly, do not panic – help is available, no matter how bad you think your financial circumstances might be.

Review your financial circumstances

By getting a handle on your financial situation, you can better understand how significant your debts may be. Many of us can be guilty of burying our head in the sand when it comes to uncomfortable communications from financial institutions regarding overdue bills. Yet facing the problem head on is the first step to finding a solution. In our thirty years’ experience of helping Canadians to gain debt relief, we recommend listing out all of your debts, the associated interest rates, your assets, income, and any expenses you have. This will help to give you a clear picture of your financial situation, and what might need to be done.

Meet with a Licensed Insolvency Trustee

Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief. They receive extensive training on supporting insolvent individuals. This makes them best placed to review your circumstances and advise you on your best course of action. At Spergel, we will offer support and guidance on all your debt relief options. These include filing bankruptcy to eliminate your unsecured debts, and creditor negotiations and legal debt settlements in the shape of a consumer proposal to reduce your debt by up to 80%. Licensed Insolvency Trustees are also the only professionals able to offer legal protection from your creditors, stopping collection calls and action like wage garnishment.

Consider your debt relief options

There are plenty of debt relief options – in fact, there are probably a few you might not have heard of before. Debt restructuring via a debt consolidation loan can be a helpful method for Canadians who are able to repay their loans in full, but who perhaps need a simplified, single monthly payment and relief on interest. Licensed Insolvency Trustees can also help you to negotiate a debt settlement with your creditors. You might be able to secure more manageable payment terms, a lower interest rate, or even an extended period over which to repay your debts. If you require something a little more pressing, consumer proposals are a great legal way to reduce your unsecured debts by up to 80% while allowing you to keep your assets and protecting you from creditors. Where greater debt is held and when perhaps no assets are at risk, bankruptcy may be your best option. It eliminates unsecured debts for good. At Spergel, our Licensed Insolvency Trustees will help you to understand your options and advise you so that you are well equipped to make the best decision for you.

Regain control over your finances

However you gain debt relief, at Spergel we will also help you to work on your money management moving forward. Whether it is understanding your expenses, creating a budget, or simply learning how to get back, we can offer support. With some forms of debt relief, you might also need to attend a couple of credit counselling sessions. You might also want to consider any ways to increase your income, like selling unwanted goods or renting out a room. No matter which debt relief pathway you take, you should try to do what you can to pay off your credit card bills when they are due. Not doing so can lead to negative impact on your credit report, and potentially a higher interest rate in the future.

Are business insolvencies on the rise too?

Yes, Canadian business insolvencies are indeed on the rise too. In fact, even more so than consumer insolvencies. CAIRP shared that Canadian business insolvencies were up a whopping 36.9% year over year in Q2 2023. This means that there were over 1,000 business insolvencies filed, the highest quarter since 2014. This increase is thought to be down to the multiple interest rate increases putting pressure on businesses, as well as inflation and weakening global economic growth.. More than ever, Canadian entities will either need more credit or face higher costs on the debts they carry. The impact of elevated interest rates also means consumer demand has diminished. It is thought that many insolvent businesses are quick to abandon ship instead of gaining the support of a Licensed Insolvency Trustee and looking at potential debt relief options to restructure their operations.

If you are a struggling entity and think you might need support, book a free consultation with Spergel. Our Licensed Insolvency Trustees offer expertise, insights, and support, no matter what your financial situation might be.

What are the consequences of insolvency?

Insolvency is worse if left unattended and unresolved. The consequences for both individuals and businesses will depend on a number of different variables, but if left unresolved, the problem will become greater and greater. The longer you leave the problem, the less debt relief options you will likely have as time passes. It could mean that eventually your only choice becomes filing bankruptcy. For this reason, it is a good idea to empower yourself by speaking to a Licensed Insolvency Trustee at the first inkling that you may be facing financial difficulties. No matter how large or small you think your debts may be, there is always a solution and we have helped over 100,000 Canadians gain debt relief. Given that insolvency can put a strain on your relationships with creditors, and can have negative consequences on your credit report, it is a good idea to address your challenges as quickly as possible. Our Licensed Insolvency Trustees can arrange a free, no obligation consultation with you to review your finances, and apply their extensive training, knowledge, and expertise to help you through financial hardship.

Although we understand that the prospect of insolvency can be tough and stressful, by being proactive about your debt problems, you can mitigate the consequences of insolvency. Make sure to regularly seek professional advice and assess your financial circumstances regularly, especially when insolvencies are on the rise. We will help you to work through your situation. Read out to Spergel today for a free consultation.

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Alan Spergel

Alan Spergel

Alan Spergel is the founder and President of Spergel. A leader in our industry, he is also a former chair of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) and has served on Canada's Superintendent of Bankruptcy Management Board. He actively supports multiple charities, ensuring that Spergel gives back to our communities and has recently been appointed as Chairman of the Board of the Humber River Hospital Foundation. Outside of the boardroom, you can find Alan playing golf, tennis, or skiing and enjoying quality time with his grandchildren.

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