When overwhelmed with debt, many consumers opt for consolidation services to simplify their debt management, maintain access to credit, and safeguard their credit rating. But there are some cases where filing for bankruptcy is the better alternative to obtaining debt relief.
Bankruptcy rules were designed to help individuals and businesses eliminate their debt without necessarily leaving the creditors and lenders at a disadvantage.
When you file for bankruptcy, one piece of information you are supposed to disclose – before being granted a discharge – is your total income. The Office of the Superintendent of Bankruptcy (OSB) then determines how much of your income can be used to cover basic household expenses on a yearly basis. This is the “surplus income threshold” or “limit.” 50 percent of earnings above this threshold should then be paid to your trustee.
Things to note about surplus income:
- The limit tends to be higher than each preceding year to account for inflation
Generally, the bigger your family and household expenses, the higher the threshold – and the greater the portion of your earnings you get to keep. Also, the higher your income, the more you pay. In other words, a household with children would pay less compared to a couple with no dependents, if they had the same income.
- You must provide evidence of your total earnings every month to your trustee
This includes salary, child tax credit, child support, spousal support, and any other sources of income.
- Surplus income is based on your net income
Your net income is calculated after taxes, deductions (but not Canada Savings Bond purchases or RRS contributions), and non-discretionary expenses (like medical expenses, child support, spousal support, and other expenses you are required to pay).
- The minimum duration you’ll be required to pay the penalty is 9 months for a first-time bankruptcy
If the trustee determines that your average income exceeds the surplus income limit by more than $200 after 6 to 7 months, you will continue paying the penalty for another 12 months (21 months total). Otherwise, the bankruptcy will be discharged after 9 months.
- The penalty for a second time bankruptcy lasts for 36 months
If you don’t have excess earnings, the bankruptcy is discharged after 24 months.
You can easily calculate your excess income with the help of a licensed insolvency trustee, and then compare it to your limit to estimate the cost of your bankruptcy. To avoid penalties associated with high income, you should discuss the benefits of debt consolidation services with your licensed insolvency trustee.