Deciphering the Regulations of Surplus Income
In the journey of overcoming overwhelming debt, it’s crucial to familiarize yourself with the concept of surplus income, particularly when navigating strategies such as bankruptcy or consumer proposals. Understanding the rules of surplus income is pivotal to effectively manage your financial situation and ensure the best possible outcomes. This comprehensive guide will shed light on this essential aspect of financial management, demystifying its complexities, and offering invaluable insights to help you steer your financial ship in the right direction.
1. The Basics of Surplus Income
1.1 Definition of Surplus Income
Surplus income is a monthly contribution you may need to pay to a Licensed Insolvency Trustee (LIT) if your earnings exceed a certain limit defined by the federal government. This payment is designated to offset losses faced by your creditors. Interestingly, not everyone hits this threshold, but certain circumstances such as a pay raise or increased working hours might make you liable to pay surplus income.
1.2 How Surplus Income Works
If your income exceeds the pre-determined threshold, a portion of the surplus income becomes payable to your LIT. This threshold is set annually by The Office of the Superintendent of Bankruptcy (OSB). The higher your income is above this threshold, the more surplus income you’re likely to pay.
The surplus income you pay is distributed to your creditors based on priority. It’s important to note that this isn’t a strategy to pay off your debt faster or speed up your proposal or bankruptcy duration. Its sole purpose is to minimize your creditors’ losses.
2. Calculation of Surplus Income
2.1 The Surplus Income Threshold
The calculation of surplus income is guided by an annual directive from the OSB. This directive includes a detailed table of surplus income thresholds that LITs use to determine if you have any surplus income obligations.
If your household’s income surpasses the surplus income threshold for your family size by $200 or more, you’ll need to make surplus income payments. These payments will be equivalent to 50 percent of the excess income, adjusted according to your contribution to your family’s income.
2.2 Factors Influencing Surplus Income Calculation
Different factors come into play when determining your position on the surplus income table. These include your monthly earnings, the size and income of your family, your statutory remittances, and your non-discretionary expenses each month.
3. Variances in Bankruptcy and Consumer Proposal
3.1 Surplus Income in Bankruptcy
In the case of bankruptcy, the LIT uses your income and expense reports to calculate your surplus income at two distinct points in your bankruptcy proceedings:
At the initiation of your bankruptcy: This helps to determine if you’ll have to make surplus income payments throughout your bankruptcy period.
The month preceding your initially targeted discharge date: This is to ascertain if any increases to your average income may have triggered a surplus income requirement.
The average surplus income earned over your nine-month bankruptcy period must be paid.
3.2 Surplus Income in Consumer Proposals
In consumer proposals, the surplus income you need to pay is calculated only at the commencement of the proposal and remains constant throughout its duration. Any changes in your income or asset value during the proposal don’t alter the payment amount.
4. Compliance with Surplus Income Regulations
4.1 Transparency and Reporting
Maintaining transparency and reporting any changes in your income to your LIT is the key to compliance. If during bankruptcy your income or earning potential increases, you and your LIT can reconsider the need for surplus income payments and calculate the necessary amount.
As a business owner, freelancer, or gig worker, you should be transparent about any fluctuations in your monthly income as large variations can raise suspicions.
4.2 Disputes and Mediation
In case of disagreements with your creditors or your LIT on the application of surplus income rules to your situation, there’s an option to resolve it through mediation.
5. How Professional Service Can Help
If your debt seems too overwhelming to handle alone, professional services like MNP can offer invaluable assistance. Their LITs are just a call away and can guide you through your options, ensuring you make an informed decision best suited for you and your family.
6. Bankruptcy and Surplus Income: Extended Insights
6.1 Surplus Income Payments in Bankruptcy
During the bankruptcy process, which can take several months to years, you might have to make surplus income payments if your average monthly income crosses the surplus income limit. You could end up paying 50% of any income earned above a government-controlled limit, in addition to the assets already included in the bankruptcy process.
6.2 Updated Surplus Income Limits
Surplus income limits are revised annually to account for inflation. You can find these updated limits on the official website of the government of Canada. The limits also vary based on the size of your household. However, if other members of your household earn an income, their income also factors into the calculations.
6.3 Impact of Surplus Income on Bankruptcy Duration
Surplus income can alter the length of your bankruptcy. If surplus income exists, the bankruptcy period may extend from 9 months to 21 months for first-time bankrupts, or from 24 to 36 months for second-time bankrupts.
7. Non-Discretionary Expenses
The Bankruptcy and Insolvency Act allows for certain non-discretionary expenses to be deducted from the family’s total monthly income before surplus income is determined. These include:
- Legally mandated support payments to children or spouses;
- Child care expenses;
- Some medical expenses;
- Court-imposed fines or penalties;
- Some employment expenses.
It’s crucial to inform your LIT about these expenses.
8. The Complexity of Surplus Income Calculation
8.1 Impact of Income Increase
An increase in income during the bankruptcy process can complicate surplus income calculation. If your income rises midway through the process, the surplus income payments are based on your average monthly income for the bankruptcy period, potentially saving you money.
8.2 Household Income Effect
Surplus income calculation also considers the net income (after tax) of the entire household. Therefore, while more members of your household increase your limit, multiple incomes are also taken into account.
8.3 Lump Sum Earnings
Lump sum payments of pre-bankruptcy income, such as a legal settlement or a pending transaction, are treated as income rather than an asset. Only 50% of this income is collected.
9. Bankruptcy as a Debt Relief Strategy
Bankruptcy aims to help individuals get back on their feet financially. It’s a reformative measure, designed to allow you to rebuild your credit and even qualify for a mortgage if you use credit wisely post-bankruptcy. Your job will generally not be affected, and there’s usually no reason for your employer to even be aware of your bankruptcy unless there is a garnishment on your wages.
10. Alternatives to Bankruptcy
10.1 Consumer Proposals
Bankruptcy can sometimes seem like an appealing way to get out of debt, especially if you do not own many non-exempt assets. However, depending on your monthly earnings, you might find yourself over the surplus income limit quickly. In such cases, a consumer proposal might be a better option.
A consumer proposal has several advantages over bankruptcy. In a consumer proposal, all of your assets are protected, and you make a fixed monthly payment for up to five years, based on your owed amount, income, and essential expenses. Most importantly, even if your income increases, your payments don’t change.
10.2 Personalized Financial Solutions
The best solution to your financial problems isn’t always apparent. Factors like surplus income can significantly alter the equation. A Licensed Insolvency Trustee can help you find the best path forward, taking into account your unique financial situation and goals.
