Eliminating Tax Debt: Can I Get Out of Tax Debt By Going Bankrupt?
Eliminating Tax Debt: CRA & Bankruptcy Decisions in Court
Understanding how to manage debt is one of the most important financial exercises you can do to benefit yourself and your future.
There are many different debt origins, including credit cards, mortgages, and car loans.
An extremely common source of debt that doesn’t get much mention is tax debt.
This debt only grows over time, unless properly managed.
Thankfully, there are multiple different ways to maneuver your tax debt while still planning for your future.
About Bankruptcy & The CRA
The word bankruptcy is heavily stigmatized, meaning that many people want to avoid declaring it.
In the case of tax debt, your creditor is the CRA (Canada Revenue Agency).
Just like all other creditors, the agency is legally entitled to take a debtor to Bankruptcy Court.
In these situations, it is up to the court to decide how to proceed in managing your debt.
However, generally speaking, the CRA is amenable to those pursuing bankruptcy, provided the individual handles everything above board.
Basically, if the person files regular returns, and makes no effort to evade their collection professionals, there is no issue with bankruptcy proceedings.
Of course, that does not mean that they will not oppose your bankruptcy pursuits.
Though this is best avoided, if the situation arises, the court will book a hearing for the matter, referred to as a discharge hearing.
For many cases, these hearings only occur when the bankruptcy proceedings are opposed.
However they are unavoidable in situations where the tax debt from income tax exceeds $200,000 and constitute more than 75% of the complete debt.
Just like with all legal proceedings, the person in debt reserves the right to counsel.
In fact, it is common for taxpayers in default to seek out legal representation to help them get a good result from a discharge hearing.
Depending on the situation, you may wish to pursue independent legal representation for the situation.
Negotiating a Settlement
Before your hearing, consider the option of settling the account directly with the CRA, enlisting the assistance of your LIT (Licensed Insolvency Trustee).
In this situation, the creditor (CRA) may be willing to help you avoid bankruptcy provided you arrange to pay the bulk of the amount owing to the Trustee.
Naturally, the courts must agree of any settlement action.
Settlements are far more ideal than going through with bankruptcy, but sometimes they are out of the question.
In this case, your discharge hearing will proceed as normal.
Rest easy knowing it is not a criminal matter, rather an opportunity to highlight your personal experience.
The court wants to know about your financial circumstances and hear from the representative of the CRA.
After going through all the relevant details, the court can decide the next actions.
Court Decisions: Bankruptcy & More
When the court decides on your situation, there are a lot of different things considered.
First, they consider your capacity to make payments.
Other considerations include your history of meeting obligations – have you historically made efforts to pay the amounts you owe and filed on time.
They will assess whether your pursuing bankruptcy is a reasonable approach or just a way to avoid paying the amount you owe.
The court takes into account your circumstances and prospects, and uses this information in conjunction with judgements made in different Canadian jurisdictions.
If bankruptcy is allowed by the court, you receive a set of conditions you must follow before being eligible for discharge from the state of bankruptcy.
When these conditions are met, you can be discharged from bankruptcy.
Alternative Choices: Consumer Proposals
If you want to avoid bankruptcy, which most individuals prefer, it may be advisable to consider the option of filing a Consumer Proposal.
In this situation, you make a formed offer to pay a portion of the amount you owe, over a newly assessed period of time.
It affords you the opportunity to pay a reduced amount of money.
This works in the situation where you have the ability to pay out your debt in regular installments.
It enables the consumer to keep control over their funds through the attempt to settle the account with the creditor (the CRA).
As a creditor, the agency is willing to accept these proposals, provided there has been some back and forth negotiations between a representative of the CRA and the consumers’ LIT.
Deciding Between Bankruptcy and Proposals
Ultimately, each approach represents a different way to get relief from financial strain and pressure.
When this financial difficulty is rooted in tax debt, it often makes the matter much more stressful for the consumer, since the creditor is a government entity.
The critical differences are that, with consumer proposals, there is no active bankruptcy on your record.
An important thing to note is that, while both options significantly reduce the amount you owe to the creditor, you have to pay the amount owing regardless.
In the case of bankruptcy, you go through all the bankruptcy proceedings – meaning it shows on your record.
Even with the process, you still have to pay the amount owing (though less than the original amount) before you are discharged from the state of bankruptcy.
When it comes down to it, there is no way around paying your debt.
There are, however, ways to mitigate the negative impacts of debt on your life and your future.
These options are generally best discovered under the purview of a skilled, professional financial advisor.
Those working in the field are informed and up to date on debt management methods.
Enabling them to give you quality advice for your financial pursuits, these professionals are educated and undergo constant training to stay informed.
Using this, they will help you navigate the murky waters of decision-making so that you can identify, and follow-up with, the route that best serves your interests.