Trends and predictions for the consumer insolvency market

Consumer insolvencies are on the rise, with 2023 filings getting back to levels that haven’t been seen since before the pandemic.

We sat down with two leading practitioners to get their assessments of 2023, what trends they are observing, and what they believe 2024 has in store for the consumer insolvency market.

In general, what have been the biggest factors pushing individuals to file in the past year? Is this different from past years?

Doug Hoyes, LIT, co-founder, Hoyes, Michalos & Associates Inc.
As in past years, insolvent debtors have overwhelming debt, mainly caused by job loss, relationship breakdowns, and medical issues. There were two new factors in 2023: inflation and higher interest rates. The cost of living has increased more quickly than most debtors’ incomes, leading to significant cash flow shortfalls and the reliance on debt to survive. Government benefits during the pandemic, which increased income for some Canadians, became a liability in 2023 as CRA significantly increased their collection efforts. Many Canadians have CERB debt to repay or a higher tax liability due to those benefits, which was a driver of insolvency in 2023.

Josh Harris, LIT, Partner, Harris & Partners
The biggest factor driving the growth in filings has been the rise in interest rates as a result of the quantitative easing done during COVID relief. The economy simply could not continue at the rate it was going without a rise in rates, and inflation has caused a severe drought in resources for the working poor. We are seeing more people struggle with every day purchases, relying on cash stores and credit cards to survive and then that resource drying out.

We are also seeing an influx in home owners that are struggling to renew mortgages due to the rise in rates, and lacking the equity to finance their way out of the debt. People are selling more houses, or living on much stricter budgets.

What notable trends are you seeing from a practice perspective, and what do you expect in 2024?

Josh Harris
It is quite clear that remote meetings with debtors are here to stay. Most debtors prefer it and we are able to reach a wider audience, to give them the help they need. Sure, there has been an influx in debt consultations, but that has been a moving goal post for years. What is important is that trustees’ integrity remains high and they do not rely on information from anyone outside of their trust circle.

The OSB has continued to perceive technology as the future and is focusing greatly on that transition. We are finding greater communication both internally and externally from the OSB, which we want to see even more of.

I believe that 2024 will see some change in policy from the OSB, a reduction in debt consultations and a path forward to tariff review for LITs. These are the 3 main points that I expect and hope to see. There will be no reduction in insolvency filings for the next 2-3 years, likely more growth in filings.

Doug Hoyes
The ability to conduct client meetings by video, thus reducing the need for a physical office, has resulted in an increase in “multi-jurisdictional” firms that operate virtually. Whether or not this is good for the profession is open to debate.

Of more significant concern is the continued growth of unlicensed, unregulated debt consultants. The OSB is aware of the issue and, on December 7, issued a Position Paper on the Adverse Effects of the Debt Advisory Marketplace on the Insolvency System. The OSB reports that in addition to debt advisors charging debtors upfront fees of over $22 million in 2021 and 2022, debtors also committed to paying post-filing fees of approximately $7.6 million last year. That is egregious. It is the LIT’s job to administer the file, so forcing (or encouraging) a debtor to pay fees to an unlicensed, unregulated debt advisor to perform tasks that an LIT should perform is a stinging indictment of the profession.

What will happen in 2024? We shall see.

The optimistic vision is that now that the Superintendent has made it clear that LITs should not accept files from debt advisors or lead generators, the debt advisory industry will cease to exist. All debtors will receive expert advice directly from a LIT or their qualified and supervised employees. That rosy view of the future will only happen if the Superintendent carries through on her threat to “consider all available options to address non-compliance including licensing measures, civil and criminal proceedings.”

The pessimistic prediction for 2024 is that the Superintendent used the term “consider,” not “will”; thus, these are words, not actions. It should be noted that the OSB has issued previous position papers on this issue (in 2006 on “Referral Agreements between Trustees and a Third Party” and in 2017 with a “Review of Licensed Insolvency Trustee business practices in relation to administration of consumer insolvencies”). I worry that this position paper will be superseded in five years with yet another position paper, and no tangible actions will occur.

I predict that in 2024 we will continue to see “compression”, where the larger firms grow more slowly, while firms “in the middle” have experienced faster growth. As a result of this compression, there are fewer large and small firms and more mid-sized firms.

Why has compression occurred? Technology has helped. The ability to do video assessments has eliminated the need for physical offices, so the large national accounting firms, with offices in every town in Canada, no longer have an advantage over the smaller firms. It could be argued that mid-sized firms now have the advantage because they are not burdened by expensive legacy office space or high personnel costs. Virtual firms can operate from a limited number of offices and have staff concentrated in lower-wage jurisdictions (outside of the big cities). A significant financial advantage is the absence of a requirement to meet in person with debtors.

But technological advances are only part of the answer. More significant factors are the two issues noted by the Superintendent above: debt consultants and lead generators. In the past, a national accounting firm generated consumer insolvency files from their existing client base, high name recognition, and the ability to deploy large advertising budgets. Smaller firms couldn’t compete, just like in many other industries.

But now, even if you are a sole practitioner, you can buy leads from a lead generator anywhere in the country. A small firm can establish a relationship with a debt consultant, and instantly, they are a national firm.

(I realize that a license is required to operate in a specific jurisdiction, as is a physical office, but those obstacles are easily overcome).

If the Superintendent “brings down the hammer” and enforces the rules, the growth of the virtual firm, reliant on lead generators and debt consultants will be curtailed. If these firms continue to be encouraged to source leads from questionable sources and continue to grow, they may become the dominant industry participants.

I assume that the trends of 2023 will continue unabated in 2024. Personal insolvency volume will continue to grow, and the mid-tier firms with relationships with lead generators and debt consultants will experience the fastest pace of growth, at the expense of the large firms (who may choose, for reputational reasons, to avoid files sourced from questionable sources) and the small firms (who don’t have the resources to compete with the larger, muliti-jurisdictional firms).

We live in interesting times.