Bankruptcy: Disability

What It Means for Debt Solutions

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Disabled individuals owing over $1,000 can file bankruptcy without losing future disability benefits. Essential assets—including RDSPs and medical tools—are protected, while monthly repayments and some tax refunds contribute to creditor settlements. Consumer proposals remain a flexible repayment option.

Eligibility for Bankruptcy While on Disability

Individuals on long-term disability benefits can file for bankruptcy if they owe at least $1,000 and are unable to meet their debt payments., Filing for bankruptcy does not negatively impact the eligibility for future disability benefits., During bankruptcy, bankrupts are required to make monthly contributions toward repaying creditors.

People on long-term disability in Canada can file for bankruptcy if they owe at least $1,000 and can’t keep up with their debt payments. Filing for bankruptcy will usually stop calls from collectors and it does not make you ineligible for future disability benefits — your right to benefits is separate from your bankruptcy. For example, if Sarah is on long-term disability and has $5,000 in unpaid bills she can’t pay, she can file bankruptcy to get legal protection and end collection actions without losing her disability benefits.

During bankruptcy you will work with a licensed insolvency trustee who sets any required monthly contributions to repay creditors. Most first-time bankruptcies with no extra income last about nine months, but payments and the timeline can change if you have surplus income or other assets. Many disability payments fall within exempt limits, but the trustee will still look at your income and may require monthly payments that are used to pay creditors.

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Protected Assets and Treatment of Disability Benefits

Disability Tax Credit refunds for the bankruptcy year or prior years are considered assets of the bankruptcy estate., Registered Disability Savings Plans (RDSPs) are generally protected from seizure in bankruptcy, except for recent contributions., Essential tools for daily living like medical equipment are protected under bankruptcy laws.

Disability Tax Credit (DTC) refunds can significantly impact individuals filing for bankruptcy in Canada. Any DTC refunds for the year of bankruptcy or the previous years are treated as assets of the bankruptcy estate. This means that they must be handed over to the Licensed Insolvency Trustee to benefit the creditors. So, if you’ve claimed DTC refunds for years leading up to your bankruptcy, expect those funds to become part of the process. However, if you receive DTC refunds for years after your bankruptcy, those amounts are considered income and managed differently under surplus income rules.

When it comes to protected assets during bankruptcy, Registered Disability Savings Plans (RDSPs) usually remain safe, except for contributions made within the year before filing. This makes RDSPs a valuable tool for saving for the future without fear of seizure. Additionally, essential items like medical equipment and mobility aids are protected under the law, ensuring that individuals with disabilities can maintain their daily living needs throughout the bankruptcy process. For example, if you need a wheelchair or a specialized medical device, rest assured these won’t be taken from you even if you are navigating through bankruptcy.

Impact of Bankruptcy on Government Benefits and Alternatives

GST refunds exceeding the threshold are returned to the bankrupt, while some are utilized to cover trustee fees., Tax returns, including the Disability Tax Credit, become part of the bankruptcy estate., Consumer proposals allow debt repayment while maintaining essential assets and income.

Bankruptcy can significantly affect government benefits in Canada, including programs like the Canada Child Benefit (CCB) and Goods and Services Tax (GST) refunds. Notably, GST refunds that exceed a specified threshold must be returned to the bankrupt individual, while any amounts required to cover trustee fees can be used for that purpose. Moreover, any income tax returns, including refunds from the Disability Tax Credit (DTC), become part of the bankruptcy estate and are claimed by the Licensed Insolvency Trustee. This means that individuals on disability may need to navigate these complexities carefully to ensure they don’t lose essential financial support during their bankruptcy process.

For those on a fixed income, consumer proposals offer a viable alternative to bankruptcy. This option allows individuals to negotiate a repayment plan with creditors while keeping necessary assets and income. With a consumer proposal, you agree to pay back a portion of your debt over a set period, without the harsh repercussions of bankruptcy. This can be especially beneficial for individuals relying on government benefits, including disability payments, as it enables them to maintain their financial stability while addressing their debts. So, if you find yourself in financial trouble, exploring a consumer proposal might be a smarter move to protect your essential income.

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References

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