How to Avoid Paying Surplus Income Bankruptcy Payments
Dealing with debt can be an overwhelming experience, particularly when repaying what you owe seems like an insurmountable task. If you’re drowning in such a financial crisis, personal bankruptcy could appear as a beacon of hope, offering a chance to alleviate your debt burden and start afresh.
However, the world of Bankruptcy in Canada comes with its own complexities. One of these complexities is the concept of surplus income payments. This article aims to demystify surplus income payments and how they are calculated, aiming to provide a clear understanding when considering the right debt relief measure for your unique situation.
Understanding Surplus Income Payments
Surplus income payments represent an essential component of the cost of Bankruptcy in Canada. In a nutshell, the more you earn, the more money you are obliged to repay your creditors once you file for Bankruptcy. The Office of the Superintendent of Bankruptcy establishes surplus income thresholds for you and your family, ensuring coverage for necessary living expenses. These thresholds serve as a guide for your Licensed Insolvency Trustee (LIT) in determining if you need to make surplus income payments and the amount of these payments.
Essentially, if your earnings exceed a specific limit, you are required to contribute half of the amount over the limit into your Bankruptcy estate as a surplus income payment. This money is then distributed among your creditors.
The Need for Surplus Income Payments
The establishment of rules and regulations for Bankruptcy entailed striking a balance between your need to eliminate debt and the rights of your creditors who initially loaned you the money. The concept of surplus income payments was introduced to ensure this balance.
Three key principles underpin surplus income:
- The more money you make, the more you’re required to pay during your Bankruptcy.
- You’re allowed to retain part of your income to cover living costs (your surplus income limit/threshold).
- Any income earned over the set amount must be paid to your LIT, who will then distribute it to your creditors.
Calculating Surplus Income Payments
Several factors determine whether surplus income payments apply to you and the amount you need to pay. These factors include:
- Your monthly income: Your income over the course of your Bankruptcy determines how much your surplus income payments will be. This income can come from a variety of sources, including employment wages, self-employment income, government benefits, pensions, and spousal support.
- The size of your family: Surplus income thresholds are lowest for individuals and increase for households with up to seven or more people.
- Your family’s income: Even if you’ve filed for Bankruptcy individually, your family’s income during your Bankruptcy is taken into account.
- Your family’s unavoidable costs: Certain unavoidable costs are deducted from your income, reducing the amount counted against your surplus income thresholds.
The table of surplus income thresholds by the Office of the Superintendent of Bankruptcy (OSB) provides examples of income and payment.
The Impact of Surplus Income Payments on the Length of Bankruptcy
Your surplus income directly impacts how long your Bankruptcy lasts. If your surplus income each month exceeds $200, your Bankruptcy is automatically extended. For a first-time Bankruptcy, the extension is for 12 months, while a second-time Bankruptcy is extended for 36 months.
Given the significant impact of surplus income on the cost and length of your Bankruptcy, it’s crucial to discuss your financial situation with your LIT before filing for Bankruptcy.
Considering a Consumer Proposal as an Alternative
If your surplus income is more than you can afford each month, you may want to consider a Consumer Proposal as an alternative form of debt relief. A Consumer Proposal could be more affordable, depending on your situation, and it allows you to Avoid Surplus Income payments.
In a Consumer Proposal, your payments are fixed, even if your income changes. For more information on a Consumer proposal, check out the cost of a Consumer Proposal.
Is It Possible to Avoid Surplus Income Payments?
Surplus income can be viewed as a penalty, as the more money you make, the more you are required to pay into your Bankruptcy. If you wish to avoid the surplus income penalty, filing for a Consumer Proposal may be the right option for you. Speak to a licensed consumer proposal administrator to learn more.
