8 Hot Topics: Personal Debt
- Are your creditors threatening to garnishee your income?
- Are you making monthly payments but finding the balance of your debt is not going down?
- Is your bank one of your creditors?
- Do you owe income tax and the Canada Revenue Agency is trying to collect?
- Do you know that CRA can register a charge against your property?
- Is a car loan part of your financial problem?
- Is your mortgage in default? Are foreclosure proceedings about to start?
- Do you know the cost of not filing your personal income tax returns?
A garnishment occurs when a creditor takes a portion of your wages or income before those funds are paid to you. A garnishment may also be served on your bank account.
A garnishment is normally made by court order. It requires your employer, bank, or another party to pay the money into court, not directly to your creditor.
If a creditor has started a court action, call us for a free consultation. You may be able to file a Consumer Proposal or bankruptcy. Both of these actions create a “Stay of Proceedings” that prevents the creditor (including the Canada Revenue Agency) from continuing or starting collection actions.
If you’re only making the required minimum monthly payments on your credit card debt and lines of credit, you’re paying little more than the interest accruing on the balance. Depending on the interest rate being charged and the balance of your debt, the time required to repay the balance can be unbearably long.
For example, a MasterCard credit card statement with a balance of $6,504.95, and charging an annual interest rate of 18.5% on the outstanding balance, requires a minimum monthly payment of $130.00. The statement indicates the estimated time to repay the balance, if you only make minimum monthly payments, at 55 years and 4 months.
If you can’t afford to increase your monthly payments, we suggest you meet with us. We’ll review your financial options for dealing with your debt.
If you owe money to the same financial institution at which you bank, your bank balance may be at risk. At any time, the bank has the right to review your repayment history. If the bank determines you’re at risk of defaulting on repaying your loans, credit cards, and so on, it can, without notice to you, freeze your bank account and offset any balance in the account against the balance of the accounts you owe.
If this issue is relevant to you, we strongly suggest you protect yourself and move your banking to an institution you don’t owe money to. Make sure you not only move your wages but also any other automatic deposits or withdrawals that you wish to continue.
If the Canada Revenue Agency (CRA) has assessed your tax returns and determined that you owe, you normally have 90 days to dispute and appeal the assessment. If you don’t appeal, CRA can, without further notice to you and without going to court, issue a “Requirement to Pay” to your bank, your employer, or a person with which you contract. Generally, CRA’s garnishment is restricted to a maximum of 30% to 40% of your gross wages. No restriction exists against bank accounts.
If you’re self-employed, CRA can serve the Requirement to Pay on a person with which you contract. In this case, CRA is not restricted in the amount it can garnishee. CRA can also serve the Requirement to Pay on parties with whom you are presently not doing business, causing you embarrassment and potentially a loss of future work.
Funds garnisheed by CRA are paid directly to CRA, not the court.
Filing a Consumer Proposal, Division I Proposal, or bankruptcy creates a “Stay of Proceedings” that prevents CRA from continuing or starting collection actions.
Have you transferred property to a related party while owing income tax? CRA has the power to review transfers of property. If it determines that the transfer occurred with a non-arm’s length person for less than fair consideration and at a time when you owed income tax, in accordance with section 160 of the Income Tax Act, CRA can assess the receiving party for the amount of the determined benefit. Your proposal or bankruptcy may not prevent CRA from assessing the recipient of the property transfer.
Normally, the amount you owe for outstanding income tax is considered unsecured debt. However, if you wait too long and you have property, CRA can register the amount you owe against your property. In doing so, it makes the registered amount of the charge a secured claim against your property.
In order to remove a CRA-registered claim, you will be required to pay it in full. Otherwise, the claim will be dealt with when the property is sold. In this situation, your bankruptcy or proposal may be of little benefit.
Filing a Consumer Proposal, Division I Proposal, or bankruptcy creates a “Stay of Proceedings” that prevents CRA from registering its claim against your property or continuing collection actions. In this case, the party who acts first very much influences the outcome.
If your car is primarily for personal use (not for business) and your car loan is in default, the lender (secured creditor) may force the collection of the debt by either
- seizing the car or
- starting a legal action to obtain a judgment and garnishee your wages.
In British Columbia, if the secured creditor seizes a “consumer good,” the unperformed obligation of the debtor and the guarantor or co-signor is extinguished. If your car is seized, your credit rating will indicate that a repossession of security (R8 rating) has occurred.
If this issue is relevant to you, you may wish to contact us. We’ll review your financial situation and advise you on how to proceed.
If you’re behind on your monthly payments or in default of other provisions of your mortgage, the lender will usually try to negotiate an agreement on how the arrears and/or default are to be rectified.
If the default can’t be rectified and the lender opts to demand all amounts due and owing under the mortgage, the lender is not obligated to accept only the arrears. However, once the lender has demanded the mortgage be paid in full, it can no longer charge an early redemption mortgage penalty.
An “Order Nisi” is the usual initial order obtained in a foreclosure action. At that time, the court sets a specific amount of time (“the redemption period”) for the borrower to pay the amount due under the mortgage. The usual redemption period is 6 months. However, the lender can request and get a shorter redemption period if the circumstances warrant it. During the redemption period, the owner of the property may sell or refinance the property and pay the amount due under the mortgage.
At the end of the redemption period, the lender usually requests an “Order for Conduct of Sale.” You are usually not forced to vacate the property until the property is sold. This gives the lender the power to list and sell the property, subject to the court’s approval. The proceeds from the sale are used to pay outstanding property taxes, strata fees (if applicable), the realtor, and the amount due and owing under the mortgage.
After the sale of the property, the lender is granted a judgment against the borrower for the difference in the net proceeds received and the amount due under the mortgage.
Occasionally, after the redemption period has expired, the lender will request an “Order Absolute.” If such an order is granted, you will be required to vacate the property immediately. However, the lender will lose the right to proceed against the borrowers for a judgment even though the property may be sold for a loss.
CRA charges both interest and penalties for not filing on time.
If you owe income tax and file after the deadline (April 30th or June 15th for self-employed), CRA will charge a penalty of
- 5% of the balance owing and
- 1% of the balance owing for each full month that your return is late, to a maximum of 12 months.
If in the last 3 years you have been charged a late-filing penalty and you are late again, CRA will charge a penalty of
- 10% percent of the balance owing for the current year and
- 2% percent of the balance owing for each full month that your current income tax return is late, to a maximum of 20 months.
In addition to the late-filing penalty, CRA will charge you compound daily interest on
- any unpaid amounts owing after April 30th (this includes the self-employed) of each year and
- any penalties charged.
If you have not been filing tax returns, CRA can estimate your income and assess you for unpaid income taxes. CRA’s assessment is often based only on an estimate of your unreported income (not your unreported expenses). The result is often a tax liability that is higher than it should be, and you now have the expense and aggravation of appealing the assessment.
Loss of benefits
Your eligibility for various government benefits is tied to your income and to the filing of your tax returns – child tax benefits, quarterly GST credits, rental assistance, MSP premium assistance, and so on.
If you’re behind on filing your taxes, we strongly suggest that you contact an accountant to get these filings in compliance.