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There are concerns insolvencies will increase further in about three to six months, once the COVID-19 financial assistance programs expire and the deferral period for mortgages and other loans end.fizkes/iStockPhoto / Getty Images

Millions of Canadians say they’re either on the verge of bankruptcy or heading toward it due, in part, to the economic impact COVID-19, according to a recent poll from DART & maru/Blue. In turn, many will seek financial advice to help get their balance sheets back on track.

“A lot of people were already overextending themselves on credit to make ends meet [before COVID-19], which is just a recipe for disaster,” says Adriana Molina, communications manager for Credit Canada in Toronto. “They never addressed their debt and when the pandemic happened, that was the tipping point and wake-up call to safeguard their finances.”

The Office of the Superintendent of Bankruptcy Canada recorded a spike in insolvencies in December 2019. Ms. Molina says there’s concern insolvencies will increase further in about three to six months, once the COVID-19 financial assistance programs expire and the deferral period for mortgages and other loans end.

Tina Tehranchian, branch manager and senior wealth advisor at Assante Capital Management Ltd. in Richmond Hill, Ont., has consulted with her business-owner clients who are worried about their financial livelihood during the pandemic. She says they’re all managing for the present.

“We put measures in place well in advance to make sure they have enough accessible lines of credit and emergency funds to dip into so they can ride [the pandemic] out for at least a year,” she says. “It starts with good cash-flow management.”

Ms. Tehranchian says communication should be a two-way street with clients, especially if they have new information about their financial situation that affects their financial plans.

“There is some onus on clients to reach out to their advisors before it’s too late to help,” she says. “But there is obviously an onus on advisors to make sure that they always ask clients about their debt in their regular checkups and make sure it’s handled correctly.”

Ms. Tehranchian’s process for helping clients financially troubled clients includes a full review of their assets, liabilities and an overall plan for paying down debt.

“Declaring bankruptcy is a last resort,” she says. “First, we want to sit down and see if there’s any way to rearrange and liquidate assets, consolidate debts, pay down debts and manage their cash flow. If all of these measures have been looked at and there’s still not enough revenue to service the debt, we need take further action.”

Ms. Tehranchian had one retired couple that came close to bankruptcy, but they were able to negotiate a repayment proposal with creditors and some extended relatives helped them financially.

The couple got into financial trouble when they wanted to loan their son significant money for his new business. Ms. Tehranchian had advised them against the move strongly, but the couple ultimately decided to borrow the funds against their paid-off home.

“I not only told them that helping their son would put their own planning in danger, but I also pointed out that their son already had a string of failed businesses,” she says. “But, ultimately, their love for their son was a lot stronger than their concern about their own finances.”

The son’s business went bankrupt within months and Ms. Tehranchian’s clients had to sell their longtime house to pay off creditors.

“It was sad to see. They had great credit history,” she says. “They had to reach out to family members to help them survive financially, which is very tough to do.”

Sometimes, advisors can get ahead of these unwise money moves by examining red flags on balance sheets, she says.

“Every year at an annual meeting, we look at a client’s net worth, the amount owing on their mortgage, their lines of credit, their credit card debt,” she says. “If I see an increase in their liabilities, that could be a warning sign.”

But some warning signs are hard to spot. Ms. Tehranchian had one client who hid his debt out of shame. He had a gambling addiction and withdrew extensively from credit lines, unknown to Ms. Tehranchian. His increasing debt load quickly exceeded all his assets within a four-month period.

“I wish he had come to me earlier and told me about his gambling issue. I had no idea. His balance sheet was always healthy. But he had suddenly lost his business and everything went downhill for him. We looked at consolidating the debt and how to negotiate with creditors but in the end, it was too late,” Ms. Tehranchian says, adding that the client had to declare bankruptcy and work directly with a licensed insolvency trustee.

Leigh Taylor, a licensed insolvency trustee at LCTaylor in Winnipeg, often works with clients referred by advisors.

“Advisors will only be able to help people so far because some situations become more than they can handle through budgeting solutions,” he says. “The sooner the client and advisor recognize there’s a problem, the more options we can present to the client to solve their problem.”

Mr. Taylor will go through different options with clients including consumer proposals, which is an offer to creditors to pay the debt at a reduced rate, or outright bankruptcy, a process that has the client signing over all their assets to trustees for the general benefit of creditors.