So you’re thinking about filing for bankruptcy, but what will it cost?

Your bankruptcy cost depends on surplus income, and this guide will show you how it works.

Let’s get started.

What is surplus income?

The premise of surplus income is that it is unjust for someone to declare bankruptcy, earn a lot of money, and then default on their debts. Therefore, your income determines how much you will pay towards your bankruptcy.

Every year, the government sets income thresholds through the Office of the Superintendent of Bankruptcy, which allows you and your family to maintain a reasonable standard of living during your bankruptcy.

When you make more money than the threshold based on your family size, you must make surplus income payments to your Licensed Insolvency Trustee, who distributes these funds to your creditors during the bankruptcy process.

Surplus income will affect the cost and the length of your bankruptcy. If you must make surplus income payments, you won’t be discharged from bankruptcy until you make all the payments.

If your income increases during your bankruptcy, you pay more into your bankruptcy. Likewise, if your income decreases, you’ll pay less.

Learn more about bankruptcy by speaking to a Licensed Insolvency Trustee.

See also: How much does bankruptcy cost?

How do I know if I have surplus income?

To establish whether you have surplus income, your household income is calculated by a Licensed Insolvency Trustee. This includes your spouse or partner’s income and anyone who contributes income to the household.

The good news is that you can deduct some costs from your income, called non-discretionary expenses.

You will be required to submit proof of your income and receipts for some expenses so that your trustee can calculate how much you need to pay.

Bankruptcy surplus income limits for 2022

The bankruptcy surplus income limits are shown below:

Family Size Income threshold
1
$2,355
2
$2,931
3
$3,604
4
$4,375
5
$4,962
6
$5,597
7+
$5,231

Source: The OSB: Directive No. 11R2-2022R: Surplus Income

How to calculate surplus income

Now that you have a basic understanding of how surplus income works, it’s time to break down how this is calculated.

Firstly, let’s sum up the monthly income of each person in your family unit (household). Canada Childcare Benefit (CCB), Canada Recovery Benefit (CRB) and Canada Emergency Response Benefit (CERB) are not included as income.

Next, any tax, deductions and non-discretionary expenses are subtracted from each family member’s income to give the available monthly income for the entire family unit.

Examples of non-discretionary expenses include:

  • Child support payments.
  • Spousal support payments.
  • Child care expenses.
  • Expenses associated with a medical condition.
  • Court-imposed fines or penalties that are in the process of being paid.
  • Expenses permitted by the Income Tax Act or similar provincial legislation.
  • Any other debt where the court has lifted a stay of proceedings and a recourse authorized.
  • Interest paid on debts that are not dischargeable in bankruptcy.

The available monthly income threshold is based on how many people live with the bankrupt person in the household.

If your family unit’s total available monthly income is higher than the threshold value, you have surplus income.

If this is the case, any amount over the threshold is reduced to the same percentage as your monthly income contribution to your household (family situation adjustment).

For example, if you earn 70% of the income for your household, then the total surplus income is reduced to this percentage.

Finally, you pay half of any amount above the threshold level to your trustee, which will be distributed to your creditors.

Example surplus income for a family unit of two

The following example for a family unit of two is taken from the Office of the Superintendent of Bankruptcy directive.

Description Amount
Bankrupt’s available monthly income: $2,800
Other family unit member’s available monthly income: $1,000
Family unit’s available monthly income: $3,800
The threshold for a family unit of two: $2,931
Total monthly surplus income: $869
Family Situation Adjustment:
(2800 ÷ 3,800 = 73.68%
$869 × 73.68% = $640.28)
$640.28
Payment required from bankrupt:
($640.28 × 50% = $320.14)
$320.14

How this works:

  • You earn $2,800 per month after tax, deductions and non-discretionary expenses.
  • Your partner earns $1,000 per month after tax, deductions and non-discretionary expenses.
  • In total, the family unit’s available income is $3,800.
  • There are two people in your family, so the income threshold is $2,931.
  • This means that your total monthly surplus income is $3,800 – $2,931 = $869
  • You contribute 73.68% of the family unit’s available monthly income, so we use this percentage to work out your share of the monthly surplus income.
  • Your share of the monthly surplus income is $640.28
  • You are required to pay 50% of that amount, which is $320.14 per month.

Does surplus income affect the duration of my bankruptcy?

Surplus income automatically extends your bankruptcy, and it takes longer to be discharged.

If your monthly surplus income payments are more than $100, a first-time bankruptcy is automatically extended to 21 months. You will make these payments over this period.

If you face high surplus income payments or you’ve been bankrupt before, a consumer proposal might be more beneficial.

First bankruptcy

  • If this is your first bankruptcy and you have no surplus income, your bankruptcy will last for 9 months.
  • If this is your first bankruptcy and you have surplus income, your bankruptcy will last for 21 months.

Second bankruptcy

  • If this is your second bankruptcy and you have no surplus income, your bankruptcy will last for 24 months.
  • If this is your second bankruptcy and you have surplus income, your bankruptcy will last for 36 months.

Third bankruptcy

  • A third bankruptcy requires a discharge hearing in bankruptcy court. The court will decide if you should be discharged and when.

Do I have to report my income and expenses?

Submitting proof of your income and receipts for some expenses is one of your bankruptcy duties.

Your Licensed Insolvency Trustee will monitor your income for 6 months for a first-time bankruptcy and 18 months if you have filed for bankruptcy more than once. After this period, a calculation is made to determine whether you need to pay surplus income payments.

If so, you will make surplus income payments for 21 months for a first-time bankruptcy and 36 months if you have filed for bankruptcy more than once.

Are there surplus income payments in a consumer proposal?

Many people choose a consumer proposal as an alternative to bankruptcy because there are no surplus income payments.

A consumer proposal allows you to consolidate your debts into one affordable interest-free payment that will not increase, even if your financial circumstances improve.

If you think that your income might increase further down the line, a consumer proposal is a better option than bankruptcy.

See also: Consumer proposal vs bankruptcy

Conclusion

Surplus income in bankruptcy can be confusing, but the basics are simple enough: the more you earn, the more you’ll pay for a longer period.

If you have a high income and need to pay surplus income in bankruptcy, a consumer proposal is a possible alternative.

To get an estimate of what your payments will be, or for some advice on how to resolve your debts, arrange a consultation with a Licensed Insolvency Trustee.

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