Can You Declare Bankruptcy on CRA Debt? Learn How LITs Help

The question “Can you declare bankruptcy on CRA debt?” could be ringing in your mind, and you’re unsure about the answer. The simple answer is that you can declare bankruptcy even if you have Canada Revenue Agency (CRA) debt, as long as your bankruptcy proposal gets approved.

That is also where the Licensed Insolvency trustee (LIT) enters the picture. Debtors are assigned bankruptcy trustees. However, only the LIT can manage and submit your bankruptcy proposal to the Government of Canada.

If you want to ensure that your proposal for insolvency gets approval even with a CRA debt, talk with the LIT appointed to you. These are experts who have handled countless bankruptcy proposals, and they can give you proper advice on how to manage your dues.

What Is a CRA Debt?

The CRA is in charge of administering the tax laws in Canada. They also hold incentive programs and social and economic benefit programs throughout the territories and provinces in Canada. What’s important to note is that the CRA can collect payments without going through the court.

Among the things that the CRA can do is freeze your bank account or seize your funds. They can also garnish your wages and withhold tax credits when needed. The CRA can also impose penalties and interest on debtors.

The good news is that you can still file for bankruptcy, even with dues from the CRA. Just ensure that you have discussed your financial situation with the CRA and have no better choice than filing for insolvency.

How Bankruptcy Stops Collection From Your CRA Debt

You can be absolved of your dues with the CRA with the help of a LIT. They will review your case and help you find a better solution. Some LITs will advise debtors to go the consumer proposal route, while others see insolvency as their best path.

The Insolvency Act

The Bankruptcy and Insolvency Act can override any CRA collection attempt. Once your insolvency proposal is received in court, it protects you from any collection attempts.

Bankruptcy and consumer proposals stop the CRA collection process and can even eliminate your dues with them. Not all dues are erased from the CRA when you have successfully filed for insolvency. Just like with any dues, it will depend on the situation.

You must talk with your LIT to ensure they understand your proposal. The trustee will then review your application and advise you on what to add or change in your proposal; they will also be responsible for submitting the proposal to court.

Proactivity With Bankruptcy

It’s not an easy decision to file for bankruptcy, so this should always be the last report of debtors. You can still absolve your CRA debt with consumer proposals. However, insolvency can cancel most of your CRA debt if you have no choice.

Filing for bankruptcy doesn't mean you have failed in life, but it’s a better solution to start over again. CRA debts can be hard to get out of, but thanks to bankruptcy, you can have a fresh start and clear out bad records from your finances.

You need to remember that bankruptcy can also affect your chances of getting credit in the future. On the bright side, tax debts can be included in insolvency proposals, which takes away a lot of stress and anxiety from debtors.

Income Tax Debt Explained

The reason income tax dues can be absolved by bankruptcy is that they are treated like unsecured dues. Any unsecured dues, including income tax dues, are cleared whenever the insolvency is completed.

One thing to note is that some exemptions and special rules for tax dues exist. You must talk with your trustee to know if your dues are part of the exemption. Ensure that your tax liability can be successfully discharged after you file for insolvency.

Even though, in general, tax dues are seen as similar to unsecured dues, you still have to check whether your situation fits with the rule. Depending on your debt type, there could be instances where your tax dues won't get discharged.

A Cheaper Alternative

Some debtors go for insolvency because it is one of the fastest and cheapest ways to get out of their debts. Bankruptcy also has fewer obstacles on its way, and you can quickly resolve your dues without waiting too long.

Remember that you need good documentation and data to approve your insolvency proposal. The trustee will review your current financial capability, assets, expenses, income, and other dues.

Some debtors choose consumer proposals, which are a less severe solution than insolvency. Of course, consumer proposals will work for some, but only for some. It still depends on your current financial situation and how well you can pay off your debt.

Surviving Debts

Although there could still be surviving dues when you file for insolvency, most will be removed. You can still file for bankruptcy depending on your financial capability, but some debts won’t be eligible for automatic discharge.

Some people have over $200,000 in personal income tax debt. Even though it could mean that your income tax dues are higher than your personal dues, you can still file for bankruptcy. Remember that bankruptcy law could still be more restrictive than consumer proposals.

If you’re wondering what dues aren’t included in a bankruptcy, it would be your government overpayments. These are dues that remain even after you’ve successfully filed for bankruptcy. It would also depend on how the government has determined what type of overpayment you possess.

Clearing Your Name Off of Debt

It‘s easy to fall into debt and very challenging to get out of it. Some people feel like after they’ve drowned in debt, there is no other choice but to save their finances. Bankruptcy is one quick way to eliminate most of your debt, but you must think it through thoroughly.

Be prepared to file bankruptcy and also be ready for the results. One of the reasons why trustees will always advise you to go for consumer proposals is because the latter is a less risky way of paying off your dues.

Whenever you find yourself in the right place, ask for guidance from your appointed trustee. They will give you sound advice on what path to pick for a debt solution. So “can you declare bankruptcy on CRA debt?” of course, as long as you’ve prepared your documents and talked with a trustee.