The Influence of Your Earnings on Personal Bankruptcy Payments
Navigating the financial labyrinth of personal bankruptcy in Canada can become a formidable task. Understanding how your income impacts your personal bankruptcy payments can make a huge difference in the journey towards financial recovery. This article aims to break down the complexities of bankruptcy payments and surplus income, providing you with a clear understanding of your responsibilities.
Key Factors Impacted by Your Income
When you file for personal bankruptcy in Canada, your income plays a significant role in two crucial aspects:
- The total amount you’re obligated to pay.
- The duration of your bankruptcy.
If your net income falls below the surplus income thresholds set by the government, and this is your first bankruptcy with no objections to your discharge, you can expect to be discharged from bankruptcy in nine months. However, if your average income exceeds the surplus income limit, the duration of your bankruptcy will be extended by an additional twelve months, and a portion of your income will be required each month during your bankruptcy.
The Role of Bankruptcy Trustee in Estimating Your Income
Prior to filing bankruptcy in Canada, you will have a meeting with your bankruptcy trustee to estimate your expected income during your bankruptcy period. Your trustee will take into account various factors such as your pay schedule (for instance, if you’re paid bi-weekly, there are two months in the year where you receive three paycheques), any expected bonuses or raises, and based on that, they will calculate your average expected income, which will determine your required monthly payment.
Each month, you will provide your trustee with proof of your income, such as your paystubs. Depending on your actual income, your trustee may request a change in the amount of your payment.
How Income Fluctuations Affect Your Bankruptcy Payments
During your bankruptcy, if there are changes in your income, your monthly payment may be subject to change. Therefore, accurately predicting your income during the bankruptcy period is crucial.
For instance, if you anticipate a decrease in your income, perhaps due to a slow season at work, it would be prudent to make larger payments during the first few months of your bankruptcy. This allows you to reduce your payments when your income decreases.
Conversely, if you expect your income to increase, making larger payments at the beginning of your bankruptcy is advisable. This way, you will not be faced with substantial “catch up” payments at the end.
Anticipated Bonus or Increase in Income
If you foresee a substantial increase in your income, it’s wise to consider ways to avoid bankruptcy. A significant bonus might be enough to get you back on track and pay off your debts in full, making bankruptcy unnecessary.
But, if the expected bonus or pay raise won’t be sufficient to fully handle your debts, and you want to avoid extra surplus income payments and a one-year extension of your bankruptcy, a consumer proposal might be a more suitable option.
In a consumer proposal, you negotiate with your creditors and work out a repayment plan based on your current affordability. If your income increases, you are not obligated to pay extra. However, if you do, you can pay off your consumer proposal faster and be debt-free sooner.
Bankruptcy and Surplus Income Payments
Bankruptcy doesn’t always free you from repaying a portion of your debts. It’s important to understand how surplus income payments can increase the cost of bankruptcy and reduce some of its benefits.
Surplus income payments are monthly contributions that go directly into your bankruptcy estate. The Licensed Insolvency Trustee (LIT) will distribute these funds to your creditors on a priority basis, guided by an annual directive from the Office of the Superintendent of Bankruptcy (OSB).
The Calculation of Surplus Income Payments
The calculation of surplus income payments is based on a table of surplus income thresholds provided in the OSB’s annual directive. Factors that determine your position on this table include:
- Your monthly income over the course of your bankruptcy.
- The size of your family.
- Your family’s income over the course of your bankruptcy.
- Your family’s statutory remittances and non-discretionary expenses.
Certain unavoidable costs are subtracted, reducing the amount that counts against your surplus income threshold. Examples include income tax and mandatory payroll deductions if self-employed, certain medical costs, interest on debts that can’t be included in a bankruptcy, child/spousal support payments, childcare costs, court fines/penalties, and more.
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 overage, adjusted to the proportion of your family’s income you earn.
How Changes in Income Affect Surplus Income Payments
If your average income increases 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, 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 prior to the LIT filing your application for a discharge.
On the other hand, if your income declines throughout your bankruptcy, there would be no significant change. You would not qualify for an earlier discharge from bankruptcy, and the LIT would not provide you with a refund for any amount you overpaid to your bankruptcy estate.
Conclusion 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 ceases when the bankrupt is discharged, or as otherwise ordered by the Court.
Finally, if you’re struggling with unmanageable debt, it’s advisable to consult a Licensed Insolvency Trustee. They can provide guidance on bankruptcy or consumer proposals, helping you make the best, most cost-effective choice for your unique situation. Understanding how your income impacts personal bankruptcy payments is the first step towards a financial fresh start.
