Filing a consumer proposal or bankruptcy creates an automatic “stay of proceedings” under federal law. That means that your creditors, the people you owe money to, cannot start or continue legal action to collect the debt. No other consumer debt relief option can make that claim. A common question that insolvency trustees get asked is whether the stay of proceedings will stop Canada Revenue Agency from starting or continuing collections on tax debts.
Does the stay of proceedings apply to income tax debts?
Yes. After filing a consumer proposal or bankruptcy, your trustee will send notice to the Canada Revenue Agency so that they are aware of the stay of proceedings. Like other creditors, they are required to cease collection activity upon being notified.
What happens if I wait too long?
You run the risk of your creditors taking things from you if you can’t pay your debts but don’t take measures to protect yourself. The legal stay of proceedings will not recover things that have already been taken, but it prevents creditors from seizing anything more.
With respect to unpaid income taxes, the Canada Revenue Agency normally starts by freezing bank accounts. They can also be aggressive in garnisheeing wages. Let it go too long, and the tax man will register a lien against your house with no consent required by you. Filing a consumer proposal or bankruptcy will not remove a lien that is already registered.
Are there exceptions to the stay of proceedings?
Yes, but not related to income tax debts. I will give you the two most common exceptions, neither having anything to do with the Canada Revenue Agency and taxes.
#1 – Filing a consumer proposal or bankruptcy does not stop a secured creditor from repossessing your car if you are behind on the car payments. By secured creditor, I am referring to the company that lent the money for you to buy the car. That creditor would have a lien against the car, other creditors would not. Not paying your other debts, including your taxes, does not give those creditors the authority to repossess your car.
#2 – Filing a consumer proposal or bankruptcy does not stop the collection of child or spousal support arrears.
Who can help me?
Sometimes, an unregulated consultant can help you negotiate a deal with your creditors. But what if negotiations have broken down and you have the tax man and other creditors knocking at your door (metaphorically not literally)? What if you need legal protection to prevent creditors from seizing your wages and assets?
Only a licensed insolvency trustee has the authority to file a consumer proposal or personal bankruptcy to create an automatic stay of proceedings. If you have tax debts and want to know how they’ll be affected in a bankruptcy or consumer proposal, contact your local trustee to discuss your options.