Bankruptcy
Does Bankruptcy Clear CRA Debt?
Filing for bankruptcy will discharge most CRA debts including income tax, but it comes with severe consequences for your credit score. Let’s explore alternatives.
Does Bankruptcy Clear CRA Debt?
While bankruptcy can clear some types of CRA debt, it's a solution that comes with significant drawbacks and long-term implications.
Yes, declaring bankruptcy in Canada can clear your unsecured debts, including those owed to the Canada Revenue Agency (CRA). This includes personal income tax debt, GST/HST, and certain penalties and interest. However, CRA debts related to fraud, misrepresentation, and tax evasion are not dischargeable.
Filing bankruptcy or a consumer proposal is the only way to completely eliminate CRA debt, but there are several alternatives worth considering before taking such extreme steps.
What Happens to CRA Debt When You Declare Bankruptcy?
Once you are declared bankrupt, your Licensed Insolvency Trustee (LIT) will handle all communications with creditors on your behalf. Under this bankruptcy protection, the CRA cannot pursue debt collections against you. Any garnishments against your salary will cease and lawsuits initiated by your creditors will be halted during this period.
Moving forward, individuals are still responsible for meeting their tax obligations while bankrupt. You’ll have to file tax returns and pay any taxes owed on income earned post-bankruptcy.
After completing the bankruptcy process, your eligible debts will be discharged, which takes around 9 to 21 months, depending on individual circumstances.
Why Bankruptcy Should Be A Last Resort
The consequences of declaring bankruptcy are significant and long-lasting. First of all, it drastically lowers your credit score which makes it difficult to obtain loans or credit in the future. A bankruptcy also remains on your credit report for up to six years (or 14 years if it’s not the first time) and is part of the public record.
Rebuilding your creditworthiness after bankruptcy is a slow process that requires diligent financial management and responsible behaviour. Due to the severe implications, it’s best to consider other options to deal with CRA debt.
Options To Pay Off CRA Debt
Tax Relief
The CRA offers various taxpayer relief provisions for those struggling with debt and financial hardship, such as waiving interest and arranging scheduled payments in affordable amounts over time. This can help pay off your tax debt without having to declare bankruptcy.
Debt Consolidation
A debt consolidation loan can simplify your debt repayment by combining multiple high-interest debts into a single loan. The primary goal is to streamline the repayment process and reduce the overall cost of the debt with lower interest.
With this loan, you can consolidate your CRA debt to free up cash flow and make payments more manageable. Just make sure to look for reputable lenders that offer favourable interest rates and a monthly payment plan you can commit to.
Consumer Proposal
A consumer proposal is a legal process that involves working with a LIT to develop a repayment plan for your debt and reduce the overall amount you owe creditors. If they accept the proposal and you complete all payments, then you will be discharged from unsecured debts, including CRA debt.
Unlike bankruptcy, filing a consumer proposal allows you to keep valuable assets like your home. However, it also has a negative impact on credit score and will remain on your credit report for up to six years.
Conclusion
If you're dealing with outstanding tax debt, it might seem like bankruptcy is the only way to reset your financial situation. However, it’s not usually the best option, and should only be reserved for the most dire circumstances. Alternatives like tax relief and debt consolidation can help you regain financial stability without the severe consequences of bankruptcy.
Remember, there's often a parachute you can deploy before considering the jump into bankruptcy.
Here at Parachute, we focus on helping Canadians build long-term financial health. Our approach to debt consolidation not only helps you handle debt but also guides you towards financial wellness, saving money, and rebuilding credit along the way.
Consider learning more to see if debt consolidation with Parachute is the right fit for you.
