The idea of bankruptcy can be scary if you have been experiencing ongoing financial challenges. However, if all other solutions have failed, it could prove to be the best decision you ever make.
The decision to file for bankruptcy is never easy. When you work with a Licensed Insolvency Trustee, we will make every effort to find ways to help you pay off debt and make your month to month money struggles more manageable.
Once we’ve determined bankruptcy makes sense for a client, their next question is usually, “What happens to surplus income during the bankruptcy process?” Here we explain surplus income and how it is handled.
What is surplus income?
Surplus income is one of the concepts many people filing for bankruptcy have difficulty wrapping their heads around. Bankruptcy rules are designed to help people eliminate debt and protect the creditors’ rights who loaned you the money. That’s a delicate balancing act that requires a fair solution, which is where the concept of surplus income comes in.
Surplus income uses three principles:
- The more someone who files for bankruptcy makes (also dependent on certain other factors), the more they have to pay into their bankruptcy to benefit their creditors.
- The government rules on income allow those who file for bankruptcy to keep enough of their income to cover general living expenses, referred to as a ‘surplus income limit’ or threshold and then they must give a portion of their income over this amount to the bankruptcy for a set period.
The surplus income limit is set by the Office of the Superintendent of Bankruptcy each year. It is based on family size, with those with larger families getting more of their surplus income because they need more to survive.
Is my Surplus Income Limit fixed?
No. The government understands inflation, and therefore, surplus income limits increase each year. It is also designed to keep people from facing other financial struggles. For example, if you earned $100,000 a year and filed for bankruptcy, you will pay more than someone who earns $20,000 per year. Adding to the equation, someone with three kids can keep more of their surplus income than a single person, so they have enough to cover living expenses.
How is surplus income tracked?
Once bankrupt, you will have to submit monthly budgets and proof of earnings. Half of any money you earn over the limit will go to your creditors. Some other things to keep in mind:
- Net income
Surplus income is based on your net income, meaning the amount of money you receive after your paycheque deductions like taxes, CPP, EI, and union dues. However, this does not include deductions such as non-mandatory RRSP contributions or Canada Savings Bond purchases. These are included in the income used to calculate your surplus income.
- All cash inflows
Your surplus income is not only based on the money you earn at work. It comprises all forms of cash inflows that you receive, including child or spousal support, CPP, OAS, pensions, and more. It’s best to report any income you receive to avoid misrepresenting your income. Your trustee will tell you if you mention something that isn’t included.
- Non-discretionary expenses
Non-Discretionary expenses are mandatory life expenses that the government rules will give you extra credit for. These are expenses such as; special medical expenses, child support payments, day care expenses, and some others. If you have these expenses and give the trustee monthly proof of them, they will reduce your required surplus income payments.
Again, it is important to share everything with your trustee to ensure your situation and deductibles are considered.
How is surplus income calculated for married couples?
Married couples who file a bankruptcy take their combined average monthly net earnings to determine their surplus income limit. It is then based on whether you have kids or not and the payment will be split by each’s percentage of the household income. The same contribution applies to 50% for any surplus.
How long do I have to pay the surplus income penalty?
It depends on whether this is your first bankruptcy or not:
- First-time bankruptcies
At the end of the first six or seven months, your trustee will average out your income. If it is over the limit set by the government, your bankruptcy is extended for 12 months. A bankruptcy lasts a minimum 9 months unless you are over the earnings limit. In this case, you are bankrupt for 21 months.
- Second-time bankruptcies
At the end of 22 months, your trustee will average out your income. If it’s over the limit set by the government, your bankruptcy is extended for 12 months. A Bankruptcy for a second time bankrupt lasts for a minimum of 24 months unless you are over the earnings limit. In this case, you are bankrupt for 36 months.
- Third bankruptcy
In this case, there is no set discharge date. Your file will have to go to bankruptcy court where they will decide on your discharge.
Just keep in mind, if you declare bankruptcy once, the best way to avoid filing again is to listen to the advice provided by your financial counsellors. They will help get you back on track, so you avoid getting into debt again.
How do I ensure I track my surplus income accurately?
There is a reason you work with a trustee when filing for bankruptcy. Our job is to work on your behalf to make sure you adhere to bankruptcy rules. We are in your corner and will calculate your surplus income for you. We will explain your limit to be more efficient in managing your living costs and understanding the cost of your bankruptcy.
Can I avoid paying surplus income?
Yes and no. If you do file for bankruptcy, you are on the hook for your surplus income. However, if you discuss your finances with a trustee first, we might find other options that may work better, like a consumer proposal.