when to file bankruptcy

No one ever sets out to go bankrupt but life happens. Dealing with unmanageable debt can spill over into other parts of your life. It can affect your personal health, your relationships, and your overall well being. Filing a Bankruptcy can be the best way forward.

Is there a better time of the year to file for Bankruptcy? How will filing affect your taxes and what happens to the money if you are entitled to a refund?

Licensed Insolvency Trustee, Jillian Taylor-Mancusi answers these questions and more. She explains how pre-filing and post-filing taxes are handled when you are in Bankruptcy.

Other questions answered are:

  • When you would benefit from filing Bankruptcy in December
  • What the costs of filing Bankruptcy are
  • How is Bankruptcy different when you are self employed
  • What the Bankruptcy Assistance Program is and who would qualify
  • What happens to your tax credits and refunds 

Licensed Insolvency Trustees are licensed by the federal government to provide debt advice. They are the only professionals that can file a Bankruptcy or a Consumer Proposal. You can be assured that the advice you receive from them will be unbiased and have your best interests in mind.   

Wayne Kay 00:04
Welcome to the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. 

I’m Wayne Kay and in today’s show we’re going to talk about when is the best time to go bankrupt. Is there a time of the year that’s best? What about taxes and dealing with that in Bankruptcy? GST credits, how are those affected with a Bankruptcy and does it make a difference if you are self-employed?

My guest today is Jillian Taylor-Mancusi from LCTaylor Licensed Insolvency Trustee with offices in Winnipeg and Kenora. Well, thanks for being here, Jillian.

Jillian Taylor-Mancusi 00:45
Hi, Wayne.

Wayne Kay 00:46
How are you?

Jillian Taylor-Mancusi 00:47
I’m great, how are you?

Wayne Kay 00:48
I’m doing terrific. And today we’re going to be talking all about the best time to go bankrupt. And in all honesty, when I first heard about this I was thinking, is there a best time or does it just happen?

Jillian Taylor-Mancusi 01:04
You know, it really is a bit of both. I’ll start by saying that if you’re having financial difficulty and you’re unable to sleep at night and it’s weighing on you, you’re really stressed out, you’re getting the creditor calls, then right now might be the best time for you to go bankrupt. 

But that being said, there is a good time to go bankrupt. And it’s not because Bankruptcy is on sale or you’re going to get a coupon code or something like that, but it really depends on the Bankruptcy itself. Let me explain. 

When you go bankrupt, what you’re doing is you’re signing over everything that you own, have a right to, or an interest in – to the Trustee. And that comes to the Trustee for the benefit of your creditors. Now, one of those things is your income tax. 

If you have an outstanding income tax return for the year prior to you going bankrupt, the Trustee is going to file that return. If there’s a refund, it’s going to come to the Trustee. If there’s something owing, it’s going to get caught up in Bankruptcy.

Now there’s also two returns done for the year of Bankruptcy. So the first one is called the pre Bankruptcy return. That goes from January 1 until the date of Bankruptcy. Again, if there’s a refund, it’s going to come to the Trustee unless you owe Revenue Canada, then they might just keep it. And if there’s more money owing, then that’s a debt that will be included in the Bankruptcy. 

The second return for the year of Bankruptcy is called the post Bankruptcy tax return. Now that’s going to go from the date of Bankruptcy until December 31. Again, if there’s a refund, it’s going to come to the Trustee. But if you own that second return, that becomes your responsibility because it’s a new post Bankruptcy debt.

So this is where timing can kind of be in your favor, if you will. Now if you go bankrupt in December, then the Trustee is going to file your pre return and your post return and there’s a really good chance you’ve already done your own prior year return. Now, if you go bankrupt in January, well then the Trustee is going to file your prior year return and get any refunds, your pre return and get any refunds and your post return and get any refunds. 

So if you pay attention, if you go bankrupt in December, you’re only really losing the year of Bankruptcy. If you go bankrupt in January, you’re going to lose your Bankruptcy and the year before, right?

Wayne Kay 03:29
And that’s with all the returns and the money. So I have to ask though, you did mention while Bankruptcies don’t go on sale, what does it cost for a Bankruptcy? Is there a cost?

Jillian Taylor-Mancusi 03:42
There is a cost and it is determined by how much money you have coming into your household. What happens is every month you’re going to keep track of your income and expenses for the Trustee. One of the things that you’re going to keep track of is your income. 

The Superintendent of Bankruptcy or the government puts out a set of standards every year that say what different household sizes can live on. And that number is the same whether you’re in Winnipeg or if you’re in Toronto or if you’re in the Yukon. It doesn’t always take into account the extra expenses in places like Toronto or the Yukon. But that being said, you’re going to make a monthly payment based on what your income is.

We’re going to look at your income, your household size, whether or not you have any non discretionary expenses. Those can include things like child support, employment expenses, health expenses, and we’re going to deduct those from your income and apply them against that standard that the government puts out. Then there’s a formula we do and that determines what your monthly payment is. 

That monthly payment also determines how long you’re in Bankruptcy for. If you don’t have what’s called surplus income, so you’re lower than the standard, then your Bankruptcy could be over in nine months if you’ve never been bankrupt before or 24 months if it’s a second time Bankruptcy.

Now, if you’re above that standard, then your Bankruptcy is going to be a little bit longer. If it’s a first time Bankruptcy, you’re looking at 21 months. And if it’s a second time Bankruptcy, you’re looking at 36 months. 

That being said, if you are somebody who, for example, is a seasonal worker and goes on EI for part of the year, you might also want to look at that because if you’re on average your income is below that superintendent standard, you might be looking at a nine month bankruptcy. If you went bankrupt on your EI time, or if you were a seasonal worker and went bankrupt when your income is really high, your Bankruptcy might get extended in 21 months.

Wayne Kay 05:45
I didn’t realize that. I’m glad we’re doing this show. So that number – maybe under 50,000 and over 50, or is it under 100 and over 100?

Jillian Taylor-Mancusi 05:57
Really it breaks down into a monthly income because you’re going to be reporting it on a monthly basis to us.

We have a monthly standard that we apply it to. Every household size is different and it changes every year because the government gives us a little bit of a raise, if you will, for inflation. So it’s around the $23 – $2,400 mark if you’re a household of one. And then it goes up to $27 – $2,800 if you’re a household of two and so on, and they go all the way up to a household of seven.

Wayne Kay 06:28
Do people ever worry that because there are some payments there that are required that if they can’t even make that, is there a fear of – what are they going to do sometimes?

Jillian Taylor-Mancusi 06:39
Now remember, if you don’t have a very high income, you don’t have necessarily required payments. Sometimes Trustees will ask for what they call a voluntary payment or agreed upon payment to help cover the cost. There’s also other programs that the government puts out called the Bankruptcy Assistance program. So if you really do have a low income and you can’t afford any payments, then you can contact the government and look at that program right now.

Wayne Kay 07:07
When they make that initial consultation with you. Because as you mentioned earlier on, you know you’re not going to get out of this debt situation that you’re in. You’re getting these phone calls and it’s just disturbing, you know you’re in a bad place. 

That’s when we want people to make a phone call to a Licensed Insolvency Trustee to learn what their options are at that point. Can you get people to stop with the calling as an LIT and then still just hold off on the Bankruptcy? So instead of filing in February that you say, okay, we’ll actually start this process in July?

Jillian Taylor-Mancusi 07:49
I would love to be able to say yes, but no. All right, so once you file something like a Bankruptcy or Consumer Proposal, that’s when the State of Proceedings goes into place and only a Licensed Insolvency Trustee can offer that. That means nobody can sue you, garnish your wages, or take any other collection practices against you. And that’s as soon as you file that Bankruptcy or Consumer Proposal. 

Now if you are having financial difficulty in February and would really like to hold off until July, sometimes getting your creditors to agree to that isn’t going to happen because they want to get paid too, or at least have a resolution, right?

Wayne Kay 08:28
Now there’s different tax credits that happen through the year as well, like GST tax credits for some people. How is that dealt with during Bankruptcy?

Jillian Taylor-Mancusi 08:41
Actually, that’s a great question because that kind of effects the same. Is there a best time to go bankrupt because GST tax credits will come to your Trustee up to a certain level and there are certain rules that go along with that depending on how much is collected and whether or not you get it back at the end. 

GST tax credits are funny because they come out, they’re delayed and when they come out. So, for example, every July is when the new GST cheques come out. So, for example, we’re in 2022 right now, but the 2021 GST cheques just start to come out in July. So going back to when the best time to file is, if you filed for Bankruptcy in December, then the next six GST cheques are going to come out.

So for example, there are two more GST cheques that are going to come out based on the 2021 tax year, and then four more cheques that are going to come out based on your 2022 tax year. Now if you waited until January of 2023 to file instead of the next, six GST cheques coming to the Trustee, the next ten checks are actually going to come to the Trustee because they’re going to get those 2021’s – four for 2022 and four for 2023. 

Wayne Kay 10:00
And when you say the money goes to the Trustee, so the refunds, if there’s refunds on your tax return or these tax credits, you then take that money and that becomes your payment, or is that used to pay down debtors?

Jillian Taylor-Mancusi 10:16
What happens when you file for Bankruptcy is the Trustee opens up a trust account, so any money that comes in under your name gets put into that trust account. That’s going to include those monthly payments that I talked about. If you have surplus income, that’s going in and any tax refunds – your GST cheques. If there’s any assets that have equity in them that are going to come to the Trustee, all of that is going to get put into that trust account. 

At the end of the Bankruptcy, first the Trustee is going to take out their fees and that’s set by a tariff in the Bankruptcy Act. That’s the same for all the Trustees in the country. And then the rest of the money is going to get given out to your creditors on a pro rata basis. 

So the higher the claim, the higher the money they get from the trust account. And that’s what I was talking about. The GST can be a little bit funny because if there’s enough money in the trust account to give a distribution to your creditors, you’re going to get your GST first. So it’s almost like a little savings account if there’s a lot of money in that trust account because you’re going to get your GST cheques back.

Wayne Kay 11:19
Okay, you’re clarifying a lot of information when it comes to Bankruptcy. I’m sure, I’m positive – this is where people just get confused. All they know is that they’re somehow not going to be able to have anything for nine months or a year and they don’t really know exactly how it works because unless you’ve gone through this process, how would you know?

Jillian Taylor-Mancusi 11:40
You know, the Bankruptcy Insolvency Act is a really thick book and Licensed Insolvency Trustees need to know everything that’s in that really thick book. So that’s why when we say it’s really important to talk to your Trustee and to talk to them early to get all of the options, that’s why. Because they know all the tools that are in that book and this is not a weekend course.

Wayne Kay 12:00
So we should say this is a very in depth training, years of training that you have to go through to become an LIT. Should we talk about – is there a difference if you are self employed?

Jillian Taylor-Mancusi 12:16
Yes. And again, it goes back to the timing issue. When you’re self employed, you don’t get taxes taken off at source, right? You file your income tax at the end of the year and you say, oh my goodness, look at all the income tax I owe. 

If you are somebody who is considering filing an assignment in Bankruptcy anyhow, and you’re coming close to the end of the year and you’re self employed, you might want to consider filing that assignment at the end of December – for example, December 31. Because remember we talked about the pre and the post tax return. So if you go bankrupt on December 31, the Trustee is going to file your pre bankruptcy return January 1 until December 31 and refunds will come to the Trustee.

But you’re self employed so you likely owe and that’s going to be a debt included in the Bankruptcy. Now you’re not likely to earn any income on December 31, so you’re going to have a nil return for your post return. So you’re not going to owe because if you owe on your post return, that’s the debt you’re responsible for. 

So again, it’s really looking at the timing. If you’re in the position to look at the timing, you know, sometimes the stress and anxiety of the debt doesn’t let you look at the dates. But if you have the ability to look at the dates, it can really benefit you.

Wayne Kay 13:36
This is great information. Anything else we need to know regarding timing payments? Anything else regarding the best time to go bankrupt and also being self employed and going bankrupt?

Jillian Taylor-Mancusi 13:49
Like I said earlier, talk to your Trustee because your Trustee knows when the best time for you to go bankrupt is. And the Trustee wears a number of different hats and one of those hats is providing you with the information so that you can decide what the best time is for you to go bankrupt. If Bankruptcy is the best option, right?

Wayne Kay 14:09
Because there’s other options many times, right?

Jillian Taylor-Mancusi 14:12
That’s why talking to the Trustee, they can guide you, they can help you find the right time, give you all the tools so that you can make the right decision.

Wayne Kay 14:23
And this is all part of talking to a Licensed Insolvency Trustee, as we always talk about, that you can do the free consultation because most of us have no clue about how any of this works. And we get in financial trouble. 

Many Canadians are getting into financial trouble. We’re carrying more credit card debt now than we have in many, many years, is what they’re saying. So we can see anything can happen to a family, illness, lose your job, anything at all.

And you can be in a very bad situation very quickly and oftentimes. Not really any fault of your own. It’s just bad circumstances that have happened.

Jillian Taylor-Mancusi 15:01

Wayne Kay 15:02
Jillian, thank you very much for all this great information. It’s always a pleasure to have you on the show.

Jillian Taylor-Mancusi 15:07
Thanks, Wayne.

Wayne Kay 15:08
My guest today, Jillian Taylor-Mancusi. To learn more or schedule a free consultation that we were talking about contact LCTaylor Licensed Insolvency Trustee. You can head to the website LCTaylor.com. 

That’s it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out debtmatters.ca. Thanks for listening.

About Jillian Taylor-Mancusi

Jillian is a Licensed Insolvency Trustee in Manitoba and Northern Ontario. She has been working in the insolvency field since 1992. A member of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), Jillian also serves as chair for Dressage Winnipeg.

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