Bankruptcy Mediation Process

Grasping the Intricacies of the Bankruptcy Mediation Process

Bankruptcy is a legal method that offers a fresh financial start for individuals overwhelmed by debts. However, this process can be complex and daunting, especially when it involves surplus income and mediation. This article will provide a comprehensive guide to help you understand the Bankruptcy Mediation Process in detail.

Embarking on the Financial Reboot Journey

Deciding to file for bankruptcy is the first step towards reclaiming your financial stability. Engaging with a Licensed Insolvency Trustee (LIT) is the initial stage of this journey, where you will get all the necessary information and guidance about bankruptcy and other related options.

Once you opt for bankruptcy, an automatic stay of proceedings comes into effect. This implies that you’re not required to make any payments to your unsecured creditors. These debts, including income tax obligations, are frozen until further notice.

The ultimate goal is to obtain a discharge that legally eliminates most types of debt. To achieve this, you must fulfill certain duties, including reporting your income. If your income exceeds a specific threshold, you may have to deal with surplus income, a concept rooted in Canadian insolvency law.

Deciphering the Concept of Surplus Income

Surplus income refers to the part of your total income that surpasses what is deemed necessary for maintaining a reasonable standard of living according to the standards set by the Office of the Superintendent of Bankruptcy Canada (Federal Government).

The net income, typically considered for this calculation, includes your earnings from any source, after deducting taxes and statutory deductions. It’s important to note that certain benefits, such as the Child Care Benefit, are not counted as part of the household income.

The surplus income is calculated based on the size of your household. For instance, the 2023 standards were as follows:

 

1 person household $2,543
2 person household $3,165
3 person household $3,891
4 person household $4,725
5 person household $5,359
6 person household $6,044
7 person household $6,729

These figures are subject to change and are averaged over the reporting period considering fluctuations in income or changes in the number of household members.

Understanding the Different Reporting Timelines

The bankruptcy process requires you to report your income for specific periods, which vary depending on whether it’s your first or second bankruptcy and whether you have surplus income.

 

First-time Bankruptcy – no surplus income.
You have to report your income for an initial 9-month period. If there’s no surplus income and you’ve completed your other duties, you’ll receive a Certificate of Discharge without needing mediation.

First-time Bankruptcy – with surplus income.
If you have surplus income, you need to submit Income and Expense Summary Reports for an additional 12 months, totaling 21 months of reporting. In this case, you’re expected to pay 50% of your surplus income for the benefit of the creditors.

Second-time Bankruptcy – no surplus income.
The reporting period extends to a minimum of 24 months. If there’s no surplus income, and you’ve completed your other duties, you’ll receive your Certificate of Discharge without needing mediation.

Second-time Bankruptcy – with surplus income.
In this scenario, you must submit Income and Expense Summary Reports for an initial 24-month period, plus an additional 12 months if you have surplus income, totaling 36 months of reporting.

The Calculation of Average Surplus

The surplus income is calculated by averaging your monthly income over the bankruptcy period. Once you’ve submitted your final Income and Expense Summary Report with the necessary income verification, the final summary of surplus income is computed and discussed with you.

Overcoming the Challenge of Non-payment of Surplus Income

If you can’t pay the surplus income in full, you won’t receive your “Certificate of Discharge”. This is where the Bankruptcy Mediation Process comes into play.

The Mediation Process Unveiled

Mediation is a tool available to those who have fulfilled all their duties but still have a balance at the end of their reporting period. The mediation process was introduced to prevent these matters from escalating to court.

Your LIT organizes the Mediation agreement in their office and prepares the document for your review and signature. This document, titled “Form 63 – Mediation Settlement Agreement,” is handled in the office to avoid court time and can usually be conducted via email or mail.

However, if you default on more than three monthly payments as stipulated in the agreement, the Mediation Settlement Agreement is considered to be in default, and the Trustee may proceed to court for a discharge application.

The agreement also includes a clause allowing you to prepay or pay the full amount due at any time. Upon completing the Mediation Settlement Agreement payment terms, you’ll receive your Certificate of Discharge.

Seeking Help – We’re Here for You

Bankruptcy is a complex process, and everyone’s situation is unique. Therefore, it’s crucial to conduct a thorough analysis of your financial circumstances before making a decision. Factors such as support payments made or out-of-pocket medical expenses can reduce the amount of surplus income.

Don’t hesitate to seek professional help to navigate the Bankruptcy Mediation Process. Reach out to a Licensed Insolvency Trustee to get a free initial assessment and make an informed decision about your financial future.

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