The pandemic we are living through is going to change our lives in some way. It’s doing so now, and it’s definitely going to have lasting effects beyond the shuttered businesses, people out of work, and hunkering down and waiting for the crisis to pass. I believe this will have long lasting effects on us as consumers, as businesses, and culturally. While this is all speculation at this point, because we don’t know when it’s going to end, let’s look at what we know is true, and what could become of this, in both Canada and the US, as far as the credit industry.
Stage 1 – The Shutdown
We’re living in this stage right now. Companies are shuttered, staff are laid off, and everything has slowed down. There are subsidies and government relief helping folks, but ultimately, income for many consumers and businesses has been reduced. This means that a greater number of delinquencies will go unpaid, or payments will be reduced or deferred.
With less payments from their current and delinquent customers, that means less revenue flowing to creditors, either directly, or indirectly through collection agencies and the court processes, which can in turn force them to balance their shortfall by partially laying off their teams, reducing services, or shutting down their company. It’s a knock on effect that kicks back to the consumers … if a telecom company has less revenue, they lay off some of their customer support staff, which causes those individual staff members to have less income, which causes them to default or defer their personal credit obligations to other companies.
Now, creditors, landlords, and banks are being pretty reasonable during this crisis – they are deferring payments or suspending interest, which they should do. However, in almost every case, any credit product, lease, purchase, or loan is not going to be wiped away, and forgiven with the wave of a magic wand. The pause button will be pressed, but it’s a temporary reprieve. If when this is all over, people don’t have jobs to go back to, or their interim finances have been compromised or reduced, everyone’s debt load will be increased. On top of that, our governments will have increased their debt load trying to blunt the impact of the pandemic and keep people employed or supported.
For the relief programs being offered by the government, it’s an indirect debt – federal deficits will need to be paid in the years to come, and whether that shows up in property taxes, sales taxes, or a reduction in government services is far beyond the scope of speculation at this point, but certainly there will be a price tag to the much needed support the government is providing today for those in need.
How long we live in this moment of pause, this shutdown where we protect the vulnerable members of our community, our families and friends? I would say weeks is optimistic, it is more likely months.
Stage II – The Credit Cycle Interrupted
If a credit cycle typically looks like a wheel, with purchases, payments, delinquencies, and default payments all cycling about, the shutdown is going to cause breaks in the cycle, chunks of inactivity along the way. Whether that’s a company that suspended operations, and stopped selling, or a financial institution that deferred mortgage or car finance payments, or a creditor that told their collection agency to suspend activities, there are going to be empty gaps in the wheel.
This is going to cause disruptions, like aftershocks from an earthquake. Even if everyone magically went back to work tomorrow, and not a single job was lost, the impact of the Stage I Shutdown would be felt for the next six months, as rent became due, credit card payments were put back on a schedule, and so on. But everyone won’t go back to work – some companies are going to close their doors permanently, and we are already seeing that with news of beloved restaurants and bars with years of history shutting down according to news articles in social media. With creditors and consumers becoming financial casualties of the pandemic, whether it’s outright debt or smaller more subtle effects like companies reducing their work forces, or people being forced get their feet under them and deal with increased debt, the aftershocks of debt from this pandemic will be felt for years.
Companies that are deferring or reducing payments? Stellar. It’s the best chance to work cooperatively with consumers, if the consumers need it. It’s a fine line, though. If all payments are suspended, even for those who are not interrupted and have the means to pay, it causes the gap in the credit cycle to increase, and creates harmful feedback to the creditor, or causes a surge in demands for payment on the consumers later that they cannot bear. There should be an adjustment and compassion for those struggling, but it’s not a tap to just be turned on or off.
Collection agencies continuing to collect? Yes, but with some humanity – I wrote about that here. As above, everyone should try to work cooperatively together – those consumers that need payment arrangements reduced or deferred should receive compassion, interest charges suspended, credit reporting of new debts halted, or the opportunity to resolve their debt in 30 or 60 days, but shutting down collections completely will cause a surge in credit reporting and legal actions later when normal activity resumes, as the debt incurred each month won’t vanish, it will be just get kicked down the road.
Some provinces and states have suspended consequences related to collections – the Housing Tribunal in Ontario has suspended evictions and tribunal hearings, New York state and others have suspended government debt collection, and in some extreme cases like Massachusetts or Nevada, private debt collection has been suspended completely. If these provincial or state governments are not careful in how we turn things back on, the ramifications will be worse than having left things as-is during the crisis. Landlords will be owed rent, and car leases will be delinquent with cars scheduled for repossession – how we negotiate resolution now and in the near future is so much more important than just jumping to consequences later when we can, or when creditors demand it.
These gaps in the disrupted credit cycle will also cause feedback to the creditors and consumers – if a creditor had a gap in their sales, they may raise prices or reduce services offered to survive. If delinquencies shoot through the roof, there may be thousands of people put into collections that wouldn’t normally be there, and our collective creditworthiness will be harmed. If there’s a gap in collections and legal work, or a surge in collection activity, liquidation of recoveries will inevitably drop, meaning that less people pay their debts voluntarily, and will suffer the consequences of garnishments, liens, or credit reporting which in turn will create a surge of consumer proposals and bankruptcies.
In consumer proposals and bankruptcies, the way out for the consumer isn’t as easy as it looks – if someone does go bankrupt, accumulated equity in their home or savings will be disbursed to creditors, and consumer proposals may resolve the majority of a debt, but at cost to the trustee and an extended payment period which will hamper or harm the creditors, who will either reduce their staff, or increase prices. But there will likely be a spike in insolvencies … it’s quiet now, because the actions that tip people over the edge – garnishments, liens, repossessions, are on pause, but when these actions start to flow again, there could be a long line of people at the trustee’s office. Doug Hoyes writes about that here).
Stage III – Getting Back To Normal
Let’s face it, our old normal will never 100% be re-achieved. The impacts on our community and how we work and play together won’t just go back the way they were. On the positive side, we might be given more leniency to work from home, or not be crammed into 10 foot by 10 foot cubicles, or we might enjoy the slower pace of life we’ve had in lockdown and take more time to bake bread and connect with friends and family by phone or Zoom. On the negative side, there may be a recession in the economy, housing prices may fall, savings may be wiped out, and prices for goods and services may rise and things we have taken for granted may be harder to afford.
When we do come out the other side, it’s not going to be a light switch simply turned back on – I am guessing that the journey back to normal will be gradual and phased in. Hypothetically, it might be gatherings of five people might be the limit in July, and going to the movies might be a luxury we don’t get until December. Arena concerts might be put off till 2022. All of this is going to have an impact on our employment, our economy, and our way of living.
We will also see regional differences. Saskatchewan or Georgia have not been as severely impacted as Quebec or New York. These less populated areas may get closer to their normal than urban areas faster. This could show a regional difference where real estate retains it’s value in Regina, but a price of a condo in downtown New York or Toronto may plummet, financially harming people in urban centers. As well, people may not need to drive in to Toronto with a 1.5 hour commute now that they have discovered remote teleworking, and they may not be comfortable sitting in a room of cubicles with hundreds of other people packed in tightly … we may see people relocate out of urban centers, distributing our populations around a little more evenly.
As well, some people are going to come out of this better than before – I don’t mean this callously. I mean the appreciation for front line workers and the lack of financial impact to grocery stores or the medical field may mean increased wages and benefits for certain industries. People in the IT or other similar service sectors who have always worked from home, or could make the transition to work from home won’t feel any financial pinch, and in some cases may be better off as they have spent less on commuting to work, eating out, or frivolously spending their excess income. There’s an excellent article on that subject here:
I also predict there will be accommodations for consumers with debt. If an auto finance company is scheduled to repossess 2,000 vehicles when the ability to do so it re-engaged, they may not want to commit slash-and-burn credit strategies on what would be otherwise good clients who have been pushed to the edge. It would certainly be in their best interests to be lenient and work out mutual arrangements.
I also predict that larger collection agencies that are built on a similar model, of hundreds of agents working in a call center will find the blow of COVID-19 hard to take. Many of them have banks as primary clients who have suspended collections, at least temporarily, which is a huge blow to their workflow. Their business model of a large call center with as many agents as might fit in a downtown urban center will no longer be practical, in the short or long term. Agents that have been laid off may resist coming back to work in such an environment, either from fear of contagion, government social distancing rules over the next year, or a loss of staff that were laid off during this pandemic. Just like there will be incentive to rebalance urban, suburban and rural population, there will be an advantage to the structure of smaller agencies that stayed open during the pandemic, or work in a less cramped environment, or could pivot to working from home due to size.
What Do We Do Right Now?
As someone who works in the collection space, I can tell you that I have insight into some of what I am talking about above, I have had a front row seat to. I’ve gone through the process of moving our staff to work from home to keep them safe, I’ve seen the immediate disruption of some of our clients putting their files on hold, or the understanding that forward flow of delinquent accounts have been paused. I know some of our competitors have simply shuttered their collection agencies or gone down to a skeleton staff. I’ve been approached by collection agents out of work looking for a job. It’s been a rollercoaster ride from the business side, to say the least.
I’ve also been honestly surprised at how many people have not been financially impacted by the pandemic, and continue to pay online or to collection agents – more than I anticipated. I’ve had a client call me and ask “I don’t mean to be difficult, but why are people still paying us on our accounts?” On the other side, I am monitoring the hundreds of consumers that have been paying who have had to reduce or pause their payments. On the human side of things, I’ve had my staff thank me for working to keep them safe and employed, I’ve had some consumers thank us for being kind and understanding, and I’ve had other consumers call us horrible monsters for continuing to collect during this time. I know some creditors are affected by the interruption in cash flow, and commercial debts listed with our agency have risen in some sectors already, and I can certainly predict some of the knock-on ramifications that this is all going to cause.
I can’t predict with any certainty when the social distancing or shuttering of businesses will be over. I certainly can’t predict what our provincial, state, or federal governments will do. I don’t know the tolerance threshold for some established companies to weather this financial storm, but I am certain many businesses will end up closing as the pandemic is a nail in their coffin, or a fatal blow to their house of cards.
I can tell you, I’ve had a personal rollercoaster working from home, maintaining a personal structure to my days, trying to keep my teams safe and connected, and I’ve talked to colleagues about the impact of all of this, and what kind of world we are going to wake up in, three, six, or twelve months from now. I am worried about catching a virus that could harm me and my family, and I know a vaccine or cure may be 12-18 months away, according to the news of the last week or two. I know that this is an event that will change our lives now and in the future, and nothing will completely go back to the ‘old normal’ again.
Thoughts, concerns, opinions? Send me an email … I seem to have some free time on my hands.
Be safe, be healthy, and be kind to each other, as best you can.
Blair DeMarco-Wettlaufer
KINGSTON Data & Credit
Brantford, ON
226-946-1730
bwettlaufer@kingstondc.com
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