Can I Discharge Tax Debt By Going Bankrupt?
An unexpected tax bill can arrive at any time, which means you could find yourself struggling to manage tax debt suddenly and without warning.
If you’ve been registered with the wrong tax code or have made a mistake when filing your taxes, for example, reassessment could mean that you now owe thousands to Canada Revenue Agency.
When you owe money to the government, it’s important to be aware that the debt is different from standard consumer debt, such as credit cards or loans.
The government has the authority to take funds from your bank account or garnish your wages in order to recoup what’s owed, so you’ll want to take a swift and proactive approach to resolving the issue.
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What happens if you don’t pay a tax bill?
Ignoring a tax bill inevitably means that penalties, fees and extra interest will be added to your account.
Even filing your taxes past the deadline will incur a penalty, so leaving a bill unpaid means additional costs can quickly escalate.
The interest on a tax bill usually starts at 5% but it can be increased as high as 50% if the matter isn’t resolved.
Of course, once interest is being applied at this level, it doesn’t take long for the debt to become completely unmanageable.
However, you don’t need to let tax debt get out of control.
With plenty of tax debt help available, it is possible to resolve the problem and leave your credit score intact.
Are you eligible for taxpayer relief?
The first form of tax debt help to look at is taxpayer relief.
This is offered by the Canada Revenue Agency itself and allows you to apply for penalties and interest to be waived or reduced.
Although you will still the outstanding amount, successfully applying for taxpayer relief can prevent any further charges from being applied to your account.
However, this form of assistance is only intended for taxpayers who are experiencing financial hardship or who are in ‘extraordinary circumstances’.
If paying your tax bill would leave you unable to buy food or pay your rent, for example, it’s likely your application for relief would be accepted.
Similarly, if the tax bill has arisen because of processing delays that were out of your control, there’s a good chance that the CRA will look favourably on your application.
When assessing your application, the CRA will look at your previous filing history.
If you’ve made numerous late filings or routinely missed payments, it’s unlikely you’ll be granted taxpayer relief.
Furthermore, it can take weeks for an application for taxpayer relief to be processed.
During this time, interest and possibly penalties will continue to be applied to your bill, so the amount you owe is likely to increase.
Could you make a consumer proposal?
A consumer proposal is an alternative to bankruptcy but remains an effective way to manage a wide variety of debts.
As well as being used to reduce government-related debts, such as unpaid tax bills, a consumer proposal can also include other types of debts, such as credit cards and loans, too.
Once you’ve filed a consumer proposal, it prevents further interest from being added to your debts.
In addition to this, it means the amount you owe will be reduced by a significant amount.
In fact, a consumer proposal can reduce your debts by up to 75%, so they’re a highly effective way of resolving mounting debt problems.
A consumer proposal usually costs around $1,800 to prepare and file and the process must be handled by a licensed insolvency trustee (LIT).
While the initial expenditure may seem high, the ability to reduce your debts by such a significant amount can certainly offset the cost involved.
Should you file for bankruptcy?
If a consumer proposal isn’t a viable form of debt management for you and your tax debt has become unmanageable, filing for bankruptcy may be the right course of action.
With assistance from a LIT, you can file for bankruptcy and have your debts discharged.
While non-exempt assets can be seized, you won’t be required to pay back the amounts that you owe to your creditors, including the CRA.
Finding the Right Debt Solutions
No matter what type of debt you have, there are financial solutions available.
Although many people are reluctant to reach out and ask for help, a significant number of Canadians experience debt issues throughout their lifetime.
By accepting help and gaining advice from experienced trustees, you can access the tax debt help you need today.
Call Bankruptcy Canada now on (877)877-4770.