Surplus Income & Bankruptcy in Canada
In 2016, nearly 126,000 Canadians either filed for bankruptcy or a consumer proposal.
When most people think of what a bankruptcy actually is, the words ‘surplus income’ probably don’t come to mind.
But, it’s important to know what a surplus income is, and how it can impact your bankruptcy.
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The Canadian government sets surplus income limits in place every year.
That means they determine how much the threshold for the amount of money you’ll make, based on your family size.
For example, if you have a family of four, your surplus income limit for 2020 is $4,168.
If your net income is $5,168 per month, your surplus income would be $1000.
If you want to know more about how to figure out your own surplus income, you can check out this calculator.
When it comes to bankruptcy, the connection is simple; the higher your surplus income is, the more you’ll be expected to pay your creditors in a timely manner.
If you make more money than the threshold put forth by the government, you may need to pay that extra money to your creditors throughout your bankruptcy.
Surplus Income and the Length of Your Bankruptcy
When you file a bankruptcy in Canada, the minimum cost is $1,800, which can be discharged in a period of nine months without surplus income.
Even if you do have surplus income, you may still be able to have your bankruptcy discharged within nine months (for your first bankruptcy) if the surplus is $100 or less per month.
But, if the surplus is greater than $200 per month, the length of your bankruptcy will be extended.
You will have to make surplus income payments for 21 months for your first bankruptcy, and 36 months for any subsequent filings.
How is the Threshold Determined?
Thanks to the Bankruptcy and Insolvency Act, the allowable income set by the government changes every year to determine what a family should earn, on average.
How and why do these numbers change?
There are a lot of variables to consider, including the state of the economy and employment, as well as inflation.
That’s why it’s so important to work with a trustee who knows the most recent threshold determinations.
Going by the amounts in years past won’t give you an accurate figure.
How to Determine How Much You’ll Need to Pay
Determining how much money you’ll need to pay each month depends on more than just your cheque.
When you work with a licensed trustee, they will use a calculation that subtracts the income threshold from your net income to determine your surplus.
Then, they’ll multiply that number by 50% to determine your actual payment.
Simply put, your surplus income payment will be 50% of what your surplus income actually is.
For example, if your surplus income is $500 per month, you’ll be required to pay $250 each month toward your bankruptcy.
That might not seem like a lot, but for a family that has other bills to pay and possible even other debts to keep up with, even a few hundred dollars can make a big dent in your monthly income.
Keep in mind that it’s not just your individual income that is factored into what your surplus will be – it’s every member of the household’s income.
The threshold amount is based on what each household’s net income is, based on the number of people living there.
So, if you and your spouse both bring home $4,000 each month, your surplus income will be based on $8,000.
It’s important to note that surplus income payments are required by law.
When you work with a trustee, they will have to report what your surplus income is, and you’ll need to make payments accordingly toward your bankruptcy.
If you do not, you cannot be automatically discharged from your bankruptcy, and the monthly figures listed above will become irrelevant.
If you think your income will increase during the time of your bankruptcy, report it.
It can increase the cost of your bankruptcy and you will likely have to pay more.
The goal is not only to avoid any legal action but to stay on track with being discharged from your bankruptcy as quickly as possible.
Are There Ways to Avoid a Surplus Income Penalty?
The best way to avoid a surplus income penalty on your bankruptcy is to file for a consumer proposal, instead.
While these aren’t right for everyone, they can end up saving you money, and you can pay them off as quickly as you want/are able.
You should consider a consumer proposal over a bankruptcy if:
- You expect your income to increase;
- You don’t want to lose your tax refund/assets;
- You want to decide what you can afford to pay each month.
Unlike a bankruptcy, a consumer proposal is actually a legal settlement you make with your creditors.
It allows you to keep all of your assets and decide on how much you can pay each month until your debt is completely gone.
It doesn’t take into consideration how much money your household brings in, or any “extra” income you might be entitled to each year.
When you’re in debt, knowing what to do and how to start the bankruptcy or consumer proposal process can be confusing on your own.
That’s why it’s so important to work with a licensed trustee.
If you’re dealing with debt and you don’t want to be penalized on your bankruptcy by having to make larger payments due to surplus income, feel free to contact us at Bankruptcy Canada.
We’ll be happy to answer any questions you might have and work with you to find the best possible solution for paying off your debt quickly.
How to File for Bankruptcy
What is Bankruptcy?
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?