Filing for bankruptcy is a hard decision to make. It’s often a last resort for individuals who are drowning in debt. The question that often arises is, Is there a best time to declare bankruptcy? This article aims to provide a thorough understanding of the timing and implications of declaring bankruptcy.
Understanding Bankruptcy
Bankruptcy is a legal process where you sign over everything you own, except for exempt assets, to a trustee. The trustee then uses these assets to repay your unsecured creditors. Bankruptcy is usually the last option for people who are unable to pay their debts.
The Optimal Timing for Declaring Bankruptcy
The optimal time to address your debt is the moment you realize you’re unable to control it. The sooner you take steps to tackle your debt, the more solutions you’ll have at your disposal. However, many people delay seeking help, hoping their financial situation will improve. For some, by the time they seek help, the only option left is bankruptcy.
Bankruptcy and Income Tax Returns
When you declare bankruptcy, your trustee files any outstanding income tax returns for you. These returns include the ones for the year of bankruptcy. This return is split into two parts: a pre-bankruptcy tax return and a post-bankruptcy tax return.
Pre-Bankruptcy Tax Return
The pre-bankruptcy tax return includes the period from January 1st until the date of bankruptcy. If there is a refund from this return, it goes to the trustee for your creditors. If there is anything owing to CRA on the pre-bankruptcy tax return, it gets included with your debts in the bankruptcy.
Post-Bankruptcy Tax Return
The post-bankruptcy tax return covers the period starting from the date of bankruptcy until December 31st of the year of bankruptcy. If there is a refund from this return, it goes to the trustee for your creditors. If you owe taxes on this return, it’s your responsibility because it’s a new, post-bankruptcy debt.
Role of Timing in Bankruptcy
The timing of your bankruptcy can play a crucial role. Let’s consider an example. If you’re planning to declare bankruptcy in December 2022, your trustee will file two returns for that year. Any refunds will go to the trustee for your creditors. However, if you wait until January 1st, 2023, to file for bankruptcy, the trustee will file three returns: one for 2022 and two for 2023. Any refunds from these returns will go to your creditors.
Dealing with GST Refunds
In some cases, your trustee can keep your GST tax credits for your creditors. If you file in December 2022, the next 6 GST cheques could go to your trustee. If you file in January 2023, the next ten cheques could go to your trustee.
It’s important to note that GST cheques are delayed in their issuance. They don’t get issued until July of the following year. For instance:
Issuance of GST / Represents tax year
January 2023 / 2021
April 2023 / 2021
July 2023 / 2022
October 2023 / 2022
January 2024 / 2022
April 2024 / 2022
July 2024 / 2023
October 2024 / 2023
January 2025 / 2023
April 2025 / 2023
Self-Employment and Bankruptcy
If you’re self-employed, timing is crucial. As mentioned earlier, if you owe on the post-bankruptcy tax return, you’re responsible for paying it. As a self-employed individual, you generally have amounts owing at the end of the year because you don’t have tax taken off at the source. If you were to file bankruptcy on December 31st, you wouldn’t have earned any income in the post period. As a result, all amounts owing would fall in the pre-bankruptcy tax return and be included with your bankruptcy debts.
Seasonal Workers and Bankruptcy
Other factors can determine the best time of year to file for bankruptcy. For instance, the length of time you’re in bankruptcy can be influenced by your monthly income. This could be relevant if you’re a seasonal worker who applies for Employment Insurance at certain times of the year. In such cases, you should explore your options with a Licensed Insolvency Trustee.
Conclusion: The Best Time to Declare Bankruptcy
If your debt load is unmanageable, the best time to file for bankruptcy is now! Dealing with the issue sooner rather than later can save you from further financial distress.
