Surplus income is a term that you might have heard while discussing bankruptcy. However, the concept of surplus income is often misunderstood or not fully grasped. This article aims to shed light on this important topic and provide insights into what surplus income is, how it’s calculated, and how it impacts bankruptcy proceedings.
The Intricacies of Surplus Income
While dealing with bankruptcy, it is crucial to comprehend the concept of surplus income. Surplus income is the amount that exceeds the limit set by the government for a household of a particular size. If your earnings surpass this threshold, you are obligated to make surplus income payments, which are then distributed among your creditors.
Delving into Bankruptcy
Bankruptcy is a legal process that provides relief to individuals who are unable to pay their debts. It is a decision that should be made after careful consideration and typically as a last resort. The bankruptcy process can take anywhere from several months to several years, and it will remain on your credit history for six to seven years from the date of your discharge.
How Surplus Income Factors into Bankruptcy
When you file for bankruptcy, you might have to sell certain assets, like property, investments, or equity in vehicles. The proceeds from these sales are then distributed to your creditors. But what many people don’t realize is that your creditors might also be entitled to a portion of your surplus income, depending on your earnings and your family size.
If your average monthly income during the bankruptcy period exceeds the surplus income limit, you might have to make surplus income payments. These payments are over and above the assets already included in the bankruptcy process.
Calculating Surplus Income
The calculation of surplus income might seem straightforward, but it can be complicated due to various factors and changes. It involves deducting non-discretionary expenses from the total monthly family income. Non-discretionary expenses can include legally mandated support payments to children or spouses, child care expenses, certain medical expenses, court-imposed fines or penalties, and some employment expenses.
Factors Affecting Surplus Income Calculation
Increase in Income
An increase in your income during the bankruptcy process can affect your surplus income payments. If your income rises part-way through the process, your surplus income payments are based on your average monthly income for the bankruptcy period.
Household Income
The size and income of your household also play a significant role in surplus income calculation. The surplus income limit increases with each additional household member. However, the income of all earning members of the household must be included in the calculations.
Lump Sum Earnings
Lump sum payments of pre-bankruptcy income, like a legal settlement or a pending transaction, are also considered in the calculation. Only 50% of such income is collected, and the actual amount can depend on when the lump sum is received.
The Role of Surplus Income in Debt Relief
Understanding surplus income and its impact on bankruptcy is crucial for devising an effective debt relief strategy. Bankruptcy can help you get back on your feet by eliminating your debts. However, surplus income payments can increase the overall cost of bankruptcy and extend the period of bankruptcy.
Alternatives to Bankruptcy
Bankruptcy is not the only solution to overwhelming debt. There are alternative options to bankruptcy that might be easier to manage and have a smaller impact on your finances. One such popular alternative is a consumer proposal.
Consumer Proposals: A Viable Alternative?
A consumer proposal can be a more appealing option if you don’t own too many non-exempt assets. In a consumer proposal, all of your assets are protected, and you make a fixed monthly payment for up to five years. Your payments do not change even if your income increases. This includes regular income and lump sum payments.
Wrapping Up
Understanding surplus income and its impact on bankruptcy can help you make informed decisions about your financial future. If you are overwhelmed by debt, it is recommended to consult with a Licensed Insolvency Trustee who can guide you through the process and help devise the best course of action.
Remember, there are many paths to financial freedom, and the best solution for your money problems isn’t always obvious. A comprehensive understanding of concepts like surplus income can help you navigate the complexities of bankruptcy and discover the best solution for your situation.
