Millions of Canadians are deferring mortgage and other debt payments — what happens when those bills come due?

Every year the Bank of Canada identifies risks to the country's financial stability in its "Financial System Review," and for several years now the top-line vulnerability has been the same: high household debt.

In a speech in 2018, Bank of Canada Governor Stephen Poloz called debt "indispensable for our modern way of life," but also a "growing preoccupation" of the central bank.

"That is because high debt levels can make us vulnerable to negative events," he said then.

It is difficult to imagine a more negative economic event than the one in which we're currently living.

Public health efforts to combat COVID-19 have led to a historic spike in unemployment as whole segments of the economy have shut down. Millions of Canadians, many of whom are heavily indebted and have little to no savings, have suddenly lost their income.

In response, the government has worked with the banks to allow Canadians to defer mortgage, credit card and other debt payments - but they won't be forgiven. So what happens when the aid runs out and suddenly, all the bills come due? Are we setting the stage for a debt reckoning on the other side of this?

"This was already a big issue before the crisis," said Lana Gilbertson, a licensed insolvency trustee and senior vice-president at accounting firm MNP. "I suspect it's only going to get worse."

Although it peaked in 2017 and has come down slightly since then, household debt in Canada has been mostly on the rise for the last 30 years, mainly due to low interest rates and rising house prices.

Canadian households' debt-service ratio - the proportion of disposable income required to meet debt obligations - rose to a record 14.98 per cent in the fourth quarter of 2019, and bankruptcies are on the rise. According to the latest data, consumer insolvencies are up 10 per cent for the 12-month period ending Feb. 29 over the same period last year.

Gilbertson said she's expecting a "significant spike" in bankruptcies due to COVID-19.

"Not necessarily right now, but certainly in the coming months and years," she said, adding that she wouldn't be surprised if the current rate doubles. "That might be a rather extreme statement, but I'm working in the trenches and this is where I see it heading for Canadians."

It was "no secret" that Canadian households were particularly vulnerable due to their heavy debt load, said Benjamin Tal, chief economist of CIBC Capital Markets. "For many, many years, low interest rates masked this vulnerability. The vulnerability is now exposed due to the virus and the economic shock we are facing."

Prior to the current crisis, the concern was that households were vulnerable to higher interest rates, which might push some towards default, Tal said.

"Now it is the opposite, interest rates are going down, but the labour market, of course, is suffering significantly."

Tal said government interventions, in the form of direct aid, lower interest rates and payment deferrals from creditors will "lower the sensitivity" of indebted Canadians and "buy some time" to get through the crisis. "So although Canadians are more vulnerable when it comes to their debt level, you will not notice this vulnerability any time soon, given all the measures," he said. "But it's there."

Household debt is going to be "one of those key things we'll have to watch," said Alicia Macdonald, associate director of national forecasting for the Conference Board of Canada. "Especially over the next year or two as the economy recovers and how much households respond to this stimulus in the form of an interest cut."

Like the banks, the Conference Board is forecasting a very deep, but very short downturn in the economy and a strong rebound in the labour market when physical distancing restrictions are lifted.

At the same time, bankruptcies could spike for people who work in certain sectors, Macdonald said.

"When we talk about an economic recovery it's not going to be felt evenly across the country."

Some segments of the economy will be harder hit or slower to rebound. Macdonald mentioned air travel, restaurants and bars, performing arts and sporting events as sectors of the economy that may take "a lot longer than average to come back" either because we may have to maintain some level of physical distancing while some parts of the economy reopen, or due to hesitation on the part of consumers to gather in large groups even after restrictions are lifted.

"The virus isn't going to disappear overnight," she said. "There will be some sectors that continue to feel the impact of that."

A few sectors are already taking permanent hits. One in 10 restaurants have closed for good as a result of COVID-19, according to a survey from Restaurants Canada.

In terms of small businesses, 30 per cent say they don't have the cash to pay this month's bills, according to a recent survey by the Canadian Federation of Independent Business.

Macdonald said the Conference Board doesn't expect a disproportionate spike in bankruptcies as a result of COVID-19, but there will be definitely be a period of "financial strain" for many businesses and families, even if they are able to take advantage of payment deferrals or low-interest loans.

Deferring mortgage or other payments will of course lead to a larger debt, said Scott Hannah, the president and CEO of the non-profit Credit Counselling Society. But that's preferable to selling your house because you can't make payments as a result of COVID-19.

"Having that added onto your mortgage balance, given rates are so low, it really is not going to have a long-term impact on a consumer, providing they have a game-plan once they get back to work to address it."

Hannah said he doesn't expect a major spike in COVID-19-related bankruptcies, partly because bankruptcy rates are already so high. He also said creditors understand that if they aren't willing to work with people, they could face a substantial loss.

"The last thing they're going to do is say, 'No, we're taking collection action.' I mean, good luck. It would be a rather brave creditor who would be taking legal action against some poor soul who has lost their job as a result of COVID-19. I suspect our court system would frown heavily on that entity."

If you've been a good customer, creditors will want to keep you, Hannah said.

"They will recognize what transpired," he said, but added that it's "critical" that individuals who can't make their payments initiate a call with banks to negotiate deferrals.

In the long term, Hannah said this experience might lead more Canadians to reduce their debt load, increase their savings and bring their spending more in line with their income.

"Sometimes it takes something like this to really drive it home for consumers how quickly something can come out of the blue and put you flat on your back."

There may be some increase in bankruptcies, said Tal, the CIBC economist. But it won't be what you might expect from the current unemployment rate, because most people who have lost their job will be able to go back to it. "That job still exists," he said. "I think the most important thing is to focus on the duration of unemployment rather than the number."

There's a significant difference between what we're going through now and other economic crises, he said.

"In a big recession, a severe recession, you go down and there's no bottom. You go down and you don't know where the bottom is. This crisis, the current crisis, has an end game."

The end game, he said, is either a sufficient reduction in the infection rate - a flattening of the curve - an effective treatment or a vaccine. "It's not a free fall," he said. "We are simply frozen. So what we're doing now, all of us, we're simply buying time."