What about my income tax debt?

Q: What about my income tax debt?

A: Personal income tax debt is just like any other unsecured debt. Once you’ve filed for bankruptcy or submitted a consumer proposal, Canada Revenue Agency (CRA) can’t take any further action against you, including wage garnishment or freezing your assets. Your trustee will notify CRA once you file, and instruct it to stop any further action against you to collect your debt.

Q: I used to be able to meet my obligations, but my income has dropped. What can I do?

A: An income reduction because of a job change or job loss isn’t unusual. If you fall behind on your debt repayment and your creditors are threatening to put you into collections, you may want to consider filing a proposal, which would allow you to reduce your payments. If you don’t have enough income to consider a proposal, you may have to consider filing an assignment in bankruptcy.

Q: If I have to file, what assets will I lose? And what will I keep?

A: A consumer proposal doesn’t have any effect on your assets, unless you choose to liquidate them to fund the proposal. Check out our “What We Do” page for a list of those assets that are exempt under provincial law should you file for bankruptcy. In many cases, you can make arrangements to allow you to keep even those assets that might normally be sold. Q: What’s a credit score? A: A credit score is a number value assigned by credit bureaus to represent your credit record. It’s kind of a shorthand way of summing up how you’ve handled credit and debt repayment in the past.

Q: What happens to my credit score if I file a proposal or for bankruptcy?

A: Your credit score is affected whenever you don’t pay your bills on time, even if you haven’t filed a proposal or for bankruptcy. When a credit bureau is notified of a proposal, they will drop your score to “bad debt,” which is the same rating you would get if your debt went to a collections agency, until the proposal period is over, which can be up to five years. It’s called “R9.” After that, it becomes an “R7,” which means you are making regular payments through a special arrangement to settle your debts. After three years, the R7 is taken off your file. In bankruptcy, your credit score goes to R9 for the nine months it takes for your bankruptcy to be discharged (assuming it’s your first time), and stays that way for seven years or more afterwards.

Q: Will closing unused credit card accounts help my credit score?

A: Closing unused credit card accounts can actually hurt your score, either by making your credit history appear younger than it is, or by reducing the total credit available to you, which can affect your debt utilization ratio very badly. Your debt utilization ratio is the total amount of credit you have available (add up all the credit limits on your cards and lines of credit) compared to the total amount of debt (add up all your balances). As a general rule, you never want your debt utilization ratio to go higher than 20% (or a one to five ratio of balance carried to limit available). Closing an unused credit card account has a bad effect on your debt utilization ratio if you are carrying a lot of debt on your other cards.

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