Should I wait until the New Year to speak to a Licensed Insolvency Trustee?
Beginning around the holiday season every year, many people wonder whether they should take the leap and seek professional help with their debt. It’s understandable that many people want to put this decision off until after the holiday season.
With all the chaos, stress, and spending it can feel daunting to add one more significant — and potentially highly consequential — decision to an already overloaded to-do list. Not to mention, getting out of debt is consistently one of the most popular new years resolutions. Better to relax the purse strings now before you have to buckle down, right? Maybe not.
One day can make a big difference
The financial impacts of a Bankruptcy or Consumer Proposal can change considerably depending whether you file before or after the new year. If getting out of debt is one of your priorities for the year ahead, we advice scheduling your Free Confidential Consultation well ahead of time so you have time to get the facts, make your decision, and take the necessary action.
Why is the new year such a critical time?
When you file a Bankruptcy, your assets vest in a Trustee for the benefit of your creditors. This includes tax refunds. A Trustee will file your taxes for the year of your Bankruptcy and any prior years that you may not have filed. Any resulting refund is an asset which the Canada Revenue Agency will automatically send to your Trustee.
What does this mean for you in a Bankruptcy?
Tax refunds
If you were to file your Bankruptcy on or before December 31 you would lose your income tax refund for the current tax year.
However, if delayed filing your Bankruptcy until the first quarter of the new year, you would lose your tax refund for the following tax year as well.
If you normally have a large tax refund, this can translate to a significant loss. Many people count on their tax refunds to fund yearly expenses such as school clothes, car repairs, or home maintenance.
Tax payment costs
You could face difficulties if you normally owe on your taxes, too — only this time in reverse.If you were to file a Bankruptcy on or before November 1, you would be responsible to pay your taxes for the remainder of the current tax year (November 1 – December 31), plus the remaining portion of the year after you file your bankruptcy. This is called the post-bankruptcy period.
Conversely, if you were to file your Bankruptcy on January 1 you would not be liable to pay any taxes for the previous year.
What does this mean for you in a Consumer Proposal?
The tax situation is much less complicated in a proposal because the trustee doesn’t prepare your taxes and your assets do not vest in a trustee.
Tax refunds
If you’re expecting a tax refund, it doesn’t matter when you file because you won’t lose your refund unless you owe money to Canada Revenue Agency.Tax payment costs
However, if you normally owe money on your income taxes you will be liable to pay the taxes for the period after the date of your proposal. For this reason — provided it’s reasonably close to year-end already — its usually best to wait until January 1 to file your Consumer Proposal.Bankruptcy or Consumer Proposal
These tax considerations are often also useful in helping people decide whether to file a Bankruptcy or Consumer Proposal, regardless of timing. If you normally receive a large tax refund, a Consumer Proposal may be the best option to protect that asset and support your financial goals. If you normally owe, there may be financial benefits to filing a Bankruptcy instead.
The bottom Line
There may be value in waiting to file your Life-Changing Debt Solution, but none in waiting to speak to a Licensed Insolvency Trustee about your situation. Start the conversation early so you can weigh all your options and plan for what comes next. MNP has offices across Canada and each of our Licensed Insolvency Trustee offer no obligation Free Confidential Consultations to help you find the best solution to sort out your debt.
Melanie Fuller
Senior Vice President
CIRP, LIT
