Understanding the Impact of Surplus Income Payments on Your Bankruptcy
Bankruptcy can be seen as a lifeline for those drowning in debt, providing a practical and feasible way to restart one’s financial journey. However, it is not always an escape route from repaying all outstanding debts. While many are aware of the potential loss of assets during bankruptcy, fewer understand that they might also be required to contribute a portion of their monthly income, known as surplus income payments. These payments can affect the cost of bankruptcy and its effectiveness in debt elimination.
This article will delve into the concept of surplus income payments and their impact on bankruptcy. It aims to help individuals facing bankruptcy understand the complexities and implications surrounding this topic.
The Concept and Purpose of Surplus Income Payments
Bankruptcy legislation aims to strike a balance between four main objectives:
- Assisting the debtor in achieving a fresh financial start and relief from unaffordable debts.
- Ensuring creditors recover the maximum possible amount of outstanding debts.
- Maintaining a reasonable standard of living for the debtor during bankruptcy.
- Ensuring the debtor can rebuild their life post-bankruptcy.
In certain financial and familial circumstances, surplus income payments may be required as part of the bankruptcy process. These monthly contributions are added to your bankruptcy estate, and the Licensed Insolvency Trustee (LIT) distributes these funds to your creditors on a priority basis.
The Office of the Superintendent of Bankruptcy (OSB) provides annual directives to LITs to determine if a bankrupt individual meets or exceeds a basic standard of living. If you are significantly above this minimum standard, you may be expected to make surplus income payments.
Calculating Surplus Income Payments
The OSB’s annual directive includes a table of surplus income thresholds that LITs use to establish whether you need to make these payments. Factors determining your position on this table include:
Your monthly income during bankruptcy – This encompasses all sources of income, such as wages from employment or self-employment, government benefits or subsidies, pensions, and spousal support.
The size of your family – As expenses typically increase with the number of family members, surplus income thresholds are lowest for individuals and progressively higher for larger households.
Your family’s income during bankruptcy – Even if you are the only one filing for bankruptcy, the OSB requires LITs to consider the impact of other income earners in your family on your standard of living and ability to repay your creditors.
Your family’s statutory remittances and non-discretionary expenses – LITs will subtract certain unavoidable costs, thereby reducing the amount that counts against your surplus income threshold. Examples of these costs include:
- Income tax and mandatory payroll deductions if self-employed;
- Certain medical costs;
- Interest on debts that cannot be included in bankruptcy;
- Child/spousal support payments;
- Childcare expenses;
- Court fines/penalties.
If your household’s available income exceeds the surplus income threshold for your family size by $200 or more, you will make surplus income payments. Your payment will be equivalent to fifty percent of the excess amount, adjusted to the proportion of your family’s income you earn.
To illustrate how this might apply to your situation, let’s consider the following examples:
Example: Family of Four
Number of people filing Bankruptcy 1
Number of people in the household 4
Bankrupt individual’s income (after deductions) $3,000
Other family members’ income (after deductions) $3,500
Family’s total available income $6,500 ($3,000 + $3,500)
Surplus income threshold for a family of four $4,725
Family’s surplus income $1,775 ($6,500 – $4,725)
Proportion of income earned by bankrupt individual 46.15% ($3,000 / $6,500)
Surplus income amount bankrupt individual is responsible for $819.16 ($1,775 x 0.4615)
Monthly surplus income payment $409.58 ($819.16/ 2)
Example: Family of Two
Number of people filing Bankruptcy 1
Number of people in the household 2
Bankrupt individual’s income (after deductions) $4,000
Other family members’ income (after deductions) $500
Family’s total available income $4,500 ($4,000 + $500)
Surplus income threshold for a family of two $3,165
Family’s surplus income $1,335 ($4,500 – $3,165)
Proportion of income earned by bankrupt individual 88.88% ($4,000 / $4,500)
Surplus income amount bankrupt individual is responsible for $1,186.55 ($1,335 x .8888)
Monthly surplus income payment $593.27 (1,186.55 / 2)
Example: Single Person Household
Number of people filing Bankruptcy 1
Number of people in the household 1
Bankrupt individual’s income (after deductions) $2,600
Other family members’ income (after deductions) N/A
Individual’s total available income $2,600
Surplus income threshold for a single person $2,543
Individual’s surplus income $57 ($2,600 – $2,543)
Proportion of income earned by bankrupt individual 100%
Surplus income amount bankrupt individual is responsible for $57 ($57 x 1)
Monthly surplus income payment $0.00
In the last example, the bankrupt individual had a surplus income, but it was less than $200 above the surplus income threshold. As a result, they would not be required to make surplus income payments during their bankruptcy.
Changes in Income and Surplus Income Payments
LITs will calculate your surplus income at two stages in your bankruptcy proceedings:
- At the start of your bankruptcy – To ascertain whether you will need to make surplus income payments.
- The month before your initially targeted discharge date – To determine if any increases in your average income (e.g., a raise, overtime, new employment) may have triggered a surplus income requirement.
Income Increase
If the second calculation shows your average income has increased by $200 or more above your surplus income threshold, you will be required to make surplus income payments.
If you were initially eligible for an automatic discharge (e.g., first-time bankrupt with no surplus income upon filing):
You would make surplus income payments for an additional 12 months before receiving your discharge.
If you were not initially eligible for an automatic discharge:
You would need to pay the total value of your surplus income requirement before the LIT files your application for a discharge.
Income Decrease
If your income falls during your bankruptcy, there will be no significant change. An earlier discharge from bankruptcy would not be granted, and the LIT would not refund any amount you overpaid to your bankruptcy estate.
The End of Surplus Payments
As per Section 9 of Directive 11R2 of the Bankruptcy & Insolvency Act:
“The bankrupt’s requirement to make payments under section 68 of the Act shall cease when the bankrupt is discharged, or as otherwise ordered by the Court. However, if an opposition to the automatic discharge has been filed, the bankrupt’s requirement to make payments under section 68 of the Act ceases on the day on which the bankrupt would have been automatically discharged had the opposition not been filed, or as otherwise ordered by the Court.”
Seeking A New Financial Beginning
If you are grappling with overwhelming debt, consider reaching out to Bankruptcy Canada for a Free Confidential Consultation to take the first step towards a financial fresh start.
In this obligation-free initial meeting, a Licensed Insolvency Trustee will review your entire financial situation, understanding your challenges and goals. They will outline all potential options to address your debt and provide an unbiased recommendation on which ones to consider and why.
If you qualify for a life-changing debt solution such as bankruptcy or a consumer proposal, the Licensed Insolvency Trustee will explain the potential costs and requirements of each and assist you in making the best, most cost-effective choice for your unique situation.
