How Severance Pay Might Affect Your Surplus Income

Understanding the Impact of Severance Pay on Your Surplus Income

In the event of job loss during bankruptcy, you may be entitled to severance pay. As severance pay is a form of income, it could potentially influence your bankruptcy payments and surplus income calculations. This article aims to provide a comprehensive understanding of how severance pay might affect your surplus income.

Defining Surplus Income

Surplus income is a key component of the cost of filing bankruptcy. It’s essentially a payment you make based on your earnings during bankruptcy. The higher your income, the greater your required payment.

The computation of surplus income involves the following steps:

  1. Ascertain the total household income.
  2. Deduct allowable expenses like child support, medical expenses, and child care.
  3. Subtract a set amount (known as a threshold) based on the number of people in your household.

Every individual filing for bankruptcy must substantiate their income and expenses for a specific duration as determined by the length of the bankruptcy. For instance, a first-time bankrupt who will be bankrupt for nine months must declare their income for seven months.

A person’s net income (after eligible deductions) is compared against the income threshold set by the Office of the Superintendent of Bankruptcy. Half of the ‘surplus’ must be paid into your bankruptcy.

Delving into the Relationship Between Severance Pay and Bankruptcy

Severance pay is regarded as income in a bankruptcy context, though its treatment depends on the specific circumstances.

Severance pay generally comes as a lump sum, which might trigger potential surplus income even if none was payable before. However, the situation changes if the severance pay is due to job loss, as it also affects the ‘waiting period’ for Employment Insurance (EI). If proof of your waiting period is provided to your trustee, your severance payment can be spread out over the waiting period, reducing the ‘monthly’ income you report. Depending on the size of your severance pay, this might be enough to lower your monthly income below the surplus income limit.

However, if you secure a new job during the period of surplus income computation, both your severance pay and new salary must be reported as income. This might trigger a potential surplus income payment even if your salary alone wouldn’t have done so.

If you’re contemplating bankruptcy and have queries regarding a potential severance payout during that period, it’s crucial to consult an experienced bankruptcy trustee prior to filing.

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