The Loans Canada team sits down with Gary Schwartz of the Canadian Lenders Association to talk about open banking.
Is Bankruptcy The Right Option For Tax Debt?
Loans Canada: The Country's Best Loan Comparison Platform
Bankruptcy is a very drastic solution to the problems of your debts, but one that is necessary for many people. When you cannot deal with your debts on your own anymore, it can be a good idea to seek out some help. While there are other, less severe options than bankruptcy, it still remains fairly common, as around 100,000 people a year file for bankruptcy in Canada alone.
While most people think they know all about bankruptcy, thinking that it simply gets rid of all of your debts, it is actually a little bit more complex. Not all of your debts are released during a bankruptcy, and there are certain exemptions and other rules you should be aware of. In order to ensure that you understand bankruptcy and CRA debt forgiveness as best as you possibly can, it’s a good idea to reach out to a licensed insolvency trustee.
One of the most common questions that people have revolves around bankruptcy and tax debt. Canada tax debt relief is a common concern for thousands of people. So, is bankruptcy is the right option for them?
Is Bankruptcy the Right Option for Tax Debt?
While bankruptcy is often filed or gone through for people who have large credit card debts, bankruptcy is actually an option for anyone with unsecured debts. Despite what many people think, tax debt is a form of unsecured debt and thus, will be eliminated after bankruptcy.
Find out what’s the difference between secured and unsecured debt?
All types of tax debts, income tax, liability, GST/HST, and deductions will be discharged, this means you won’t owe them once your bankruptcy is complete.
However, the rules and bankruptcy law are a little bit stricter for those who owe more than $200,000 in tax debt. Even so, there is a good chance your debts will still be forgiven during the bankruptcy but automatic discharge will not be an option for you. If this represents your situation, you need to speak to an expert.
Government overpayments, which often come from social assistance or employment insurance, is one form of debt that sometimes cannot be included in a bankruptcy. Some of these debts could potentially follow you even after a bankruptcy, this, of course, depends on how the overpayment is handled. Again, if you are unsure about your situation, you should speak with an expert about your situation.
How the Process Will Work
If you have tax debts and want them to be discharged during your bankruptcy, there are a few things that you need to do. Firstly, you’ll need to file all of your unfiled tax returns from previous years. This is done to confirm that you’re actually in debt to the government, and determine how much you owe exactly.
Check out which receipts you should hold on to for taxes.
Next, your trustee will make sure that the CRA has not placed any liens on any of your assets (such as a house or vehicle) or that any of your bank accounts have not been frozen.
Check out how owing taxes to the CRA affects your credit score.
Is it the Best Option?
Sometimes, bankruptcy is the best option for getting out of your tax (and other) debts. However, before choosing bankruptcy, you should consider other less sever options like:
A consumer proposal is an agreement with your creditors, it is created by the licensed insolvency trustee that you’ll work with. Within your consumer proposal, you’ll agree to pay back a specific amount of the total debt you owe them and your creditors agree to forgive the rest. It is a legally binding agreement that will provide you with protection from debt collectors, who can be a nightmare to deal with.
Will your creditors accept your consumer proposal? Look here for the answer.
If you’re unable to pay your tax debts right away, you can arrange a payment schedule with the CRA. This will allow you to pay off your tax debt over a period of time. However, in order to do so, you need to be able to show the CRA that you have tried and failed to pay off the tax debt.
If your request is accepted, the CRA will review you finances and determine a payment plan that works for you and them. Failure to pay can result in wage garnishment and seizure of assets.
Waived Interest and Penalties
Depending on your situation you may be granted some leniency. If the CRA deems your case special, you may have your tax penalties and interest waived. However, it’s important to remember that they will not relieve you of your entire debt.
In order to receive this leniency, you must be able to show the CRA why your situation is special. Some circumstances that may warrant relief include death of a immediate family member, a serious injury or illness, natural disasters (i.e: a fire), or a civil disturbance.
Depending on your financial situation any one of the mentioned options can help you with your tax debt. Working with an expert will help you determine which debt relief option is best for you.
Learn more on what you can do if you owe taxes to the CRA.
How to Avoid Future Tax Debt Problems?
Now that you know that there are debt relief options available to help you deal with your tax debts, what does the future have to hold? You don’t want these types of tax debt problems to follow you around, so you need to be sure to improve yourself and your knowledge in the future.
Will you be able to buy a house if you owe taxes? Find out here.
You need to understand what got you into this situation and how to prevent it from happening again. For example, some people have tax debt problems because they are self-employed and can’t afford to pay taxes in April, as they don’t put aside money for taxes every year. You need to identify the cause of your tax debt problems and fix it, or else you risk running into the same issue every year.
In conclusion, bankruptcy is a common way for people to deal with their tax debt problems. We hope this article has helped you understand all about tax debt and how it will be discharged like any other unsecured debts during a bankruptcy. Of course, before filing for bankruptcy and expecting all of your debts to be forgiven, you should speak with a professional. Loans Canada can help connect you with a licensed insolvency trustee in your area.
Largest Lender Network In Canada
Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.
goPeer — Helping Consumers Achieve Financial Freedom by Connecting Canadians Looking For Financing With Canadians Looking to Invest
goPeer is Canada's first consumer peer to peer lending platform and connects creditworthy Canadians looking for a loan with everyday Canadians looking...