BANKRUPTCY INCOME TAX & DEBT

Relief from Overwhelming Income Tax Debt

In most cases, it is possible to include income tax debt in a bankruptcy, and to be released from it at the successful completion of the bankruptcy. However, the Canada Revenue Agency (CRA) has the ability to dispute a claim as well as to request a meeting with the trustee and the person filing bankruptcy. In general we have found the CRA is favorably disposed to those people who are ‘honest but unfortunate’ debtors that are making a serious effort to get their finances in order. Note – it is also usually possible to include income tax debt in consumer proposals, an option your trustee will discuss with you

Before Filing Bankruptcy

Before filing a bankruptcy, income tax filings must be brought up to date. Even if documentation has been lost – or it has been years since the last filing, it is possible to bring filings up to date.

Liens and Garnishees

As long as there has not been fraud, a bankruptcy discharge will usually result in any liens or garnishees filed by the CRA being lifted.

Tax Refunds

If the person filing bankruptcy is eligible for a refund on their income taxes – that refund will become part of the bankruptcy estate and be distributed by the trustee to the unsecured creditors.

Pre-bankruptcy and Post-bankruptcy Income Tax Returns

The trustee will work with the person declaring bankruptcy to file a pre-bankruptcy income tax return (January 1 of the year the bankruptcy is filed to the day before the starting date of the bankruptcy) and a post-bankruptcy income tax return (from the starting date of the bankruptcy to December 31st of the year the bankruptcy is filed). This is done in part because income tax due on the pre-bankruptcy return can be included in the bankruptcy, and because the debtor is responsible for taxes due on the post-bankruptcy return.

BANKRUPTCY UNSECURED DEBT & SECURED DEBT

What is Unsecured Debt & Secured Debt?

Unsecured Debt & Secured Debt – Explained Understanding the differences between ‘unsecured debt’ and ‘secured debt’ is required when dealing with Bankruptcy and Division 1 /Consumer Proposals. In our Glossary, we describe unsecured debt as: A specific sum of money owed to a creditor for which no security rights against the debtor’s assets were given. In our Glossary, we describe secured debt as: A specific sum of money owed to a creditor for which security rights against the debtor’s assets were given. While these are accurate and suitable descriptions for a glossary, many of our clients need fuller explanations. To do that, we will start by explaining what ‘secured debt’ is.

What is Secured Debt?

Mortgages are secure debts. If you take out a mortgage on a house from a bank and you do not honor the terms of the mortgage (i.e. make all the payments on time) then the bank has the right to seize the house and sell it in an effort to recover the money owing on the loan. Note: there are laws that cover the extent of a secure loan holder’s rights – and how they can be used. Most car loans are secure debts. If you take out a secured car loan and you fail to honor the terms of the loan (i.e. make all the payments on time) the lender has the right to seize the car and sell it in an effort to recover the money owing on the loan. Other loans can be secured loans if, as a condition of the loan, you promise the lender that something that belongs to you, can be seized by the lender if you do not honor the terms of the loan. Secured debts are usually loans where the person taking out a loan (the debtor) promises the lender that certain assets can be seized by the lender, if the debtor does not honor the terms of the loan.

What is Unsecured Debt?

Credit card debt is unsecured debt. No specific assets are promised to the lender if you fail to honor the terms of the credit card agreement. Personal bank loans are usually unsecured debt. None of your assets are promised to the bank if you fail to honor the terms of the loan agreement. Most of your monthly bills are unsecured debts – i.e. Toronto Hydro, cable, phone etc. Unsecured debts are debts where the creditors (i.e. Toronto Hydro, credit card companies etc.) have no rights over specific assets of the person who owes the debt.

Note: Income tax debts are unique and must be discussed with your Trustee.