Canadians’ insolvency problems might not be as bad as everyone thinks, C.D. Howe says
The increase in Canadian insolvency filings may be less serious than previously thought, according to one of the country’s top economic research institutions.
Consumer insolvencies in Canada rose to the highest in eight years in March. However, it’s difficult to know “how loudly the alarm bell is ringing” because the publicly released figures don’t distinguish between cash flow and balance sheet insolvencies, the C.D. Howe Institute said in a blog posting.
Balance sheet insolvency is when a person is still unable to pay off debts, even after selling off all of their assets. Cash flow insolvency, on the other hand, is when a person can’t pay off debts because of difficulties selling their assets. Of the two, balance sheet insolvency is more serious.
“It’s hard to sell your house at a moment’s notice, but that’s really a matter of being illiquid, and not what economists would typically think of as insolvency,” said Jeremy Kronick, associate director of research at C.D. Howe and one of the report’s authors. “There’s a big difference between selling all your assets and still being in debt, versus selling them all and not.”
There’s a big difference between selling all your assets and still being in debt, versus selling them all and not
Jeremy Kronick, C.D. Howe
Along with near-record debt-service ratios and rising borrowing costs, rising insolvencies are adding to concern about the sustainability of the country’s lofty household debt levels. To determine how significant the increase in insolvencies is, Kronick argues data at the individual level is needed.
The Ottawa-based Office of the Superintendent of Bankruptcies separates insolvencies into bankruptcies and so-called proposals, when a debtor agrees with creditors to pay off a certain portion of the debt over time. The OSB’s monthly and quarterly reports give the volume of insolvencies, without disclosing liabilities and assets. It discloses those in its annual reports, but aggregated by city and region.
“Bankruptcies and consumer proposals include both cash-flow and balance sheet insolvencies,” a spokesman for the OSB said by email. “No distinction is made under the Bankruptcy and Insolvency Act between those two types of insolvencies.”
In addition to calling for more detailed insolvency data, the researchers argue some of the warnings about Canada’s rising debt loads may be overstated, given the country’s debt-to-net worth ratio has stayed relatively constant at 20% since 2007, even though debt-to-GDP has risen to 100%, from 75%.
“We’re not saying all’s well,” Kronick said. “We’re just trying to say there’s a big difference that we should recognize, but we can’t because we don’t have enough here to tell us.”