Understanding Surplus Income When Bankrupt in Canada
When faced with financial turmoil, individuals often resort to declaring bankruptcy as a last resort. However, in Canada, the process isn’t as straightforward as simply declaring bankruptcy. It involves the notion of surplus income, a complex concept that can significantly impact the cost and duration of the bankruptcy process. This concept also influences an individual’s ability to manage spousal and child support payments.
What is Surplus Income in the Context of Bankruptcy?
Surplus income is an integral part of bankruptcy rules in Canada. This concept was introduced to strike a balance between the rights of creditors and the debtor’s need to eliminate their debts. It’s based on a few key principles:
- The higher your income, the more you will be obligated to pay during your bankruptcy.
- A portion of your income, deemed reasonable to cover normal living expenses (your surplus income limit or threshold ), will be exempted.
- Any income earned above this threshold will be subject to a 50% penalty paid to the trustee.
The Office of the Superintendent of Bankruptcy annually sets the surplus income limits. Larger families have a higher limit, allowing them to retain more income. These limits are also adjusted each year to account for inflation.
How Surplus Income is Calculated
The calculation of surplus income may seem complicated, but it’s primarily based on your net income and the size of your family. For instance, if a single individual earns $3,043 per month after tax, and the threshold for a single person is $2,543 per month, the surplus income will be the difference between these two figures. In this case, it’s $500 per month, and the ‘penalty’ or surplus income payment is half of that amount, or $250.
For families, the process is similar. If a couple with two children has combined monthly earnings of $6,725, and the surplus income limit for a family of four is $4,725, they are $2,000 above the limit. This means they’re required to pay $1,000 per month while bankrupt (half of $2,000).
The Duration of Surplus Income Payments
The duration of surplus income payments is dependent on the debtor’s income and the number of times they have declared bankruptcy. If, after the first six or seven months of your bankruptcy, your average income is more than $200 over the limit set by the government, your bankruptcy is extended for 12 months.
- A first-time bankruptcy lasts for at least nine months, but if you’re over the earnings limit, you’ll be bankrupt for 21 months.
- A second-time bankruptcy lasts for a minimum of 24 months, but if you’re over the earnings limit, you’ll be bankrupt for 36 months.
- In a third bankruptcy, you’ll need to go to bankruptcy court, where the length of your bankruptcy will be decided.
The Impact of Surplus Income on Spousal and Child Support
Surplus income calculations include all types of cash inflows each month, including child support and spousal support. Moreover, your earnings are reduced by non-discretionary expenses that may not necessarily appear on your paycheque, such as court-ordered child support or spousal support, or mandatory medical expenses.
Exploring Alternatives to Bankruptcy
Given the complexities and financial implications of surplus income, it may be worthwhile to consider alternatives to bankruptcy, such as a consumer proposal. This option allows you to negotiate with your creditors to reduce your debts and extend your repayment period, effectively bypassing the surplus income calculations.
The Role of Licensed Insolvency Trustees (LIT)
Licensed Insolvency Trustees (LIT) are federally regulated debt advisors in Canada who can offer you advice and support in all areas of debt and insolvency. They can explain your bankruptcy duties and responsibilities, including surplus income payments, and help you decide on the best debt relief option for your personal situation.
Can You Avoid Surplus Income Payments?
While surplus income payments are a mandatory part of bankruptcy, some strategies can help you minimize their impact. If you’re concerned about surplus income payments affecting the total cost of your bankruptcy or have a higher income and want to avoid the surplus income penalty, consider filing for a Consumer Proposal where your payments are fixed even if your income changes.
Conclusion
While dealing with bankruptcy and managing spousal and child support can be a daunting task, understanding the concept of surplus income and its implications can make the process more manageable. By working with a Licensed Insolvency Trustee and exploring all your available options, you can navigate the bankruptcy process and work towards a brighter financial future.
