How Severance Pay Might Affect Your Surplus Income

How Does Severance Pay Affect Your Surplus Income Payments?

Claiming bankruptcy can be an effective way to eliminate your debts, but it can also lead to you losing your job or specific forms of income.

However, you may be entitled to some form of severance pay during this process.

If you’ve been working at your current position for many years, then the amount can be surprisingly high.

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What is severance pay?

Severance pay is often mixed up with termination pay, but the two are entirely different things.

Severance pay is a form of income that you receive when you lose your job.

You only get severance pay if you’ve worked at least five years with your current employer.

They must also meet a number of other requirements:


  • Your employer must pay wages of at least $2.5 million per year, or
  • At least 50 people will be losing their jobs within a 6-month period due to the business scaling down.


There is an online Severance Pay Calculator that you can use to figure out how much severance pay you’ll receive.

The general rule is that you get a week’s worth of pay for every year that you’ve worked with the company.

This is capped at 26 weeks.

Since severance pay counts as income, it can actually affect your surplus income.

What is surplus income?

Surplus income is the cost you pay for filing bankruptcy.

The amount you pay is based on the amount of money you earn during your bankruptcy.

This means that the higher your income, the more you’re required by the law to pay.

This is based on three factors:


  • The total income in the entire household.
  • Minus allowable deductions such as child care, child support or medical expenses.
  • Minus an amount based on the number of people in your household.


When claiming bankruptcy, you’re required to report and prove your income and expenses for a specific number of months.

Your net income (after deductions) is then compared against the Office of the Superintendent of Bankruptcy’s (OSB) income threshold totals.

You will be asked to pay half of that surplus into your bankruptcy.

Severance pay and bankruptcy

Severance pay is often received as a lump sum, meaning it can trigger potential surplus income when claiming bankruptcy.

However, severance pay from a lost job is a different situation because it affects your waiting period for the Employment Insurance (EI) program.

If you can show your trustee proof that you’re still waiting for your severance payment, it can be prorated over the waiting period to reduce the monthly income that you report.

Depending on how much severance you receive, this could be enough to lower your monthly income below the surplus income limit.

If you’d like to learn more about severance pay, surplus income and how it relates to your bankruptcy claim, don’t hesitate to get in touch with us today for more information.

Canadian Bankruptcies

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What is Bankruptcy?
Bankruptcy FAQs
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?

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