Understanding Surplus in Bankruptcy
If you are considering filing for bankruptcy, it is important to understand the concept of surplus income. Generally, when we hear the word "surplus" we think of it in a positive way, such as having more than what is needed, or an abundance of something. In the context of bankruptcy, it means something a little different. First, let's consider bankruptcy itself. Bankruptcy is governed by the Bankruptcy and Insolvency Act. The intent is to allow a debtor to be discharged from his or her debts, subject to reasonable conditions. Bankruptcy is filed through a Licensed Insolvency Trustee, who will administer the bankruptcy and manage assets held in trust. The trustee also ensures that both the debtor and the creditors are treated fairly.
When you file for bankruptcy, you are still allowed to earn an income. The Canadian government has established a list of income levels for households of various sizes. If your household's income is larger than the level outlined in the law, then you are required to make additional payments during the bankruptcy. These payments known as surplus income payments, are made available to your creditors. Simply put, under the concept of surplus income, the more money you make, the more money you will pay in your bankruptcy.
Factors in determining surplus income
Surplus income varies based upon each person's family circumstances. Whether surplus income payments are required and how much they will cost, depends primarily on three factors:
- The household's monthly income;
- The number of dependents in the household;
- The amount of eligible expenses you may be permitted to deduct.
When you file for bankruptcy, you must submit proof of your family income to the Licensed Insolvency Trustee (LIT). After that, every month you must send the trustee copies of your wage statements. You will also need to submit proof of any other available income, such as pensions. The Licensed Insolvency Trustee will deduct applicable non-discretionary expenses of the bankrupt and his or her family, such as child support payments, child care expenses, and expenses associated with a medical condition. There is often overlap between divorce law and bankruptcy law, so in the case of divorce, it becomes a little more complicated. If the parents are separated or divorced, the child tax will be included in the household income for the parent with primary custody of any children. Based on this information the Licensed Insolvency Trustee will calculate how much you are required to contribute. Any money the bankrupt family receives above the set income level is subject to a surplus income payment of 50% during the course of the bankruptcy.
How is surplus income calculated?
The current monthly income thresholds and surplus income calculations for 2019 are set forth on the Government of Canada. The bankruptcy law sets a limit on your monthly after-tax earnings. The surplus income rules have established the following formula for calculating the monthly surplus income payment: Net Income – Threshold = Surplus x 50 % = Payment.
If, for example, your limit is $2,152 per month (the limit for one person in 2018) and you earn $3,152 per month, your earnings are $1,000 over the limit, so you must pay $500 per month. If your pay increases, you will pay more. If your pay decreases, you will pay less. However, if you earn less than the limit, you will not be required to make a surplus income payment to the trustee during the bankruptcy. If your average income is more than $200 in excess of the limit, your bankruptcy is extended for an extra year.
Important points to consider
Your surplus income may affect the length of your bankruptcy
Surplus income is a key factor in the length of your bankruptcy. If you do not have to pay surplus income, based on your average monthly income, then you may be able to achieve a discharge from bankruptcy in nine months, if it is the first bankruptcy you have ever filed. However, if your income is higher than the limits provided in the law, your bankruptcy will be extended for an extra year. Your bankruptcy is concluded when you are granted a discharge.
The level of allowable income changes each year
The level of allowable income is set by the government, and this amount changes every year to account for inflation and other factors.
Surplus income involves more than your pay cheque
Your Licensed Insolvency Trustee takes more into account than just your pay cheque. To calculate surplus income, the trustee takes the monthly income of everyone in the household. This, minus allowed deductions, determines your net income.
The law requires surplus income payments
In accordance with the Bankruptcy and Insolvency Act, you must report your income and expenses. Other duties include updating contact information and new job information with your Licensed Insolvency Trustee when needed. You are also required to attend two financial counseling sessions, in order to help you learn how to budget and manage money in the future. You must make any surplus income payments necessary, and your trustee is responsible for reporting whether or not you have made your payments. If you do not make your payments, you will not be eligible for discharge from bankruptcy.
It is important to understand and plan for the possibility of surplus income payments in bankruptcy. Before filing for bankruptcy, ask your Licensed Insolvency trustee to estimate your surplus income payments. Provide your trustee with complete and accurate information. If you are expecting a bonus, or overtime pay, or any extra pay months, be sure to tell the trustee because that will increase your average monthly pay. If the estimated surplus income is more than you can afford, your Licensed Insolvency Trustee can advise you on your options and help you make informed decisions.
For more information about surplus in bankruptcy, contact us. We are here to help you navigate debt consolidation solutions that are best for you.