Can a Bankruptcy or Consumer Proposal Cover Government Debt?
If you have government debts, you are probably aware that you can’t obtain effective debt relief through a credit counselling debt management plan or a personal debt settlement program.
Government creditors do not negotiate with credit counsellors or individuals when it comes to debts.
However, debt relief solutions administered by a licensed insolvency trustee can help you obtain forgiveness for unsecured government debts, such as federal or provincial student loans, income tax or other Canada Revenue Agency payments, Medical Service Plan, etc.
Here is a brief introduction of how a bankruptcy of a consumer proposal can cover government debt.
How bankruptcy or consumer proposal settles CRA debts
CRA debts, or Canada Revenue Agency debts can refer to a variety of outstanding payments you haven’t been able to make, such as personal income tax, GST or corporate tax, and also the relevant accrued interest and penalties for those debts.
As soon as you file for bankruptcy or a consumer proposal with a trustee, all creditors’ actions are stopped.
This will include wage garnishment, bank account seize, and collection agencies.
Government agencies do not need a court order to garnish your wages.
Additionally, the bankruptcy or consumer proposal procedures will also halt accrued interest, which means that the amount you owe does not increase anymore.
Personal bankruptcy cancels the debt altogether assuming you can pay the cost of bankruptcy, $1,800.
If you intend to pay off your CRA debt in affordable chunks, the consumer proposal allows you to negotiate a reduced payment.
The debt is forgiven once the agreed amount is paid over the course of the consumer proposal, which can take up to 5 years.
How bankruptcy or consumer proposal settles student loan debts
Student loans are unique in the sense that you can negotiate different repayment options directly with your creditor.
You may not need the support of a licensed insolvency trustee if some of the repayment options from the National Student Loan Service enable you to write-off your debt.
Indeed, you can apply for a repayment assistance plan or a revision of your payment terms.
Former students with permanent disabilities can also apply for customized repayment assistance and benefits.
If you have left school for over 7 years and are struggling to pay off student loans, bankruptcy and consumer proposals can help you settle the debt.
You can also apply to be relieved under a hardship provision if you file for bankruptcy, even if it has been less than 7 years.
How bankruptcy or consumer proposal settles MSP debts
Filing for bankruptcy or consumer proposal cancels your Medical Service Plan premiums and outstanding MSP balance.
But, bear in mind, that your ongoing premiums will resume as normal after the date of filing, assuming you have any.
Additionally, it is worth discussing your previous years’ tax returns with a financial advisor or your trustee.
Indeed, MSP premiums are calculated on the basis of previous tax returns.
In other words, if you’re behind on tax filings or you filed incorrectly, it can affect your eligibility to MSP and your debts.
Don’t let government debt drag your finances down.
A licensed trustee can get you a government debt settlement with a bankruptcy or consumer proposal.