When self-employed and sole proprietor owners get overwhelmed with debt, many file for bankruptcy to gain a fresh start. However, after you have filed for bankruptcy, you might have to make monthly payments known as surplus income payments.
It’s important to know when you declare bankruptcy what your income is and if it will change in the near future. If you are working during your bankruptcy process, you may have to make surplus income payments.
But how will surplus income affect you? Here are the ten most common questions answered regarding surplus income and surplus income payments:
1. What is the definition of surplus income?
After you declare bankruptcy, the Office of the Superintendent of Bankruptcy has a formula that must be used to calculate the amount of your monthly payment based on your current income, family size, and financial situation. If you do not fall under these rules you just pay the basic fee.
2. What are surplus income payments?
If your income exceeds the Office of the Superintendent of Bankruptcy’s standard, you will have to make surplus income payments to your trustee. Keep in mind, the higher your income is, the higher your surplus income payments will be.
Having dependents such as children affects your surplus income payments. For example, if you have children, you would pay less surplus income payments based on the number of dependents than a couple without children earning the same income.
3. How is surplus income calculated?
First, you must submit proof of your income to your trustee every month. This includes:
- Payment statements or stubs, RRSP and RESP contributions, spousal support, child tax benefits, and other financial obligations you need to pay. You also need to report any other sources of income you receive, such as monetary loans from family or freelance income from odd jobs.
- Your trustee will tally your monthly amount and apply the government formula.
If your take-home income doesn’t have a surplus income, your trustee will expect you to make monthly minimum payments to cover the administrative costs of the bankruptcy (their fee).
4. How long do I have to make surplus income payments?
First-time bankruptcy individuals should expect to make surplus income payments for 21 months. For those on a second bankruptcy, payments will last for 36 months. For a third bankruptcy and any following bankruptcies, payments will last for 36 months, and the bankruptcy court may decide further payments.
5. What if I stop making my surplus income payments?
It is the trustee’s job to collect these payments on behalf of your creditors. If you stop making your monthly surplus income payments to your trustee as required, you prolong your bankruptcy process and will not get an automatic discharge. Instead, your case will be sent to the bankruptcy court. The court will then decide how much longer you will stay bankrupt and any amount to be paid.
As a general rule of thumb, if you decide to file bankruptcy, you must accept that you will have to pay your surplus income payments to get discharged.
6. How does my fluctuating income affect surplus income payments?
In the case of fluctuating income the amount of surplus income is based on an average over the required period (21 or 36 months).
7. Is surplus income calculated before or after tax is deducted?
Surplus income is calculated based on your income after tax and other basic deductions.
8. What if I don’t agree with the surplus income payment amount?
If you don’t agree with the surplus income amount required, your trustee will request mediation with the Office of the Superintendent of Bankruptcy to determine if any adjustments are possible.
9. Can I avoid making surplus income payments?
No. Once you decide to file bankruptcy, surplus income payments cannot be avoided. If you don’t think you can make monthly surplus income payments, talk to your trustee about a consumer proposal or perhaps lowering the monthly payment to the trustee but staying bankrupt longer..
10. How will my surplus income affect the bankruptcy process?
It’s essential to make your monthly surplus income payments to stay on track with the bankruptcy process. In instances when you stop making payments and don’t catch up, your trustee will notify the bankruptcy court about your missed payments. When you don’t pay, you won’t get discharged from bankruptcy.
The bankruptcy laws allow you to get control back of your finances; although you are obligated to pay surplus income payments. As you can see, if you are a sole proprietor owner or self-employed individual in Toronto, the GTA, or Southern Ontario looking to file bankruptcy, these rules on Surplus Income are something you must be aware of.
To learn more about surplus income payments or if you have any questions, call Kevin Thatcher & Associates at 1-888-329-5198 or contact us here.