In a bankruptcy, the amount of money you are required to pay is based on your income. Under the surplus income guidelines, the government of Canada has set net monthly income thresholds for a person or family to maintain a reasonable standard of living. Every dollar you make that is above this threshold is considered surplus income and you are required to remit 50% of your surplus to your trustee.
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What is the surplus income penalty?
In many regards, surplus income is a penalty because the more you make, the more you are required to pay into your bankruptcy. If you have a high income, this can mean your monthly bankruptcy payments could be high as well.
The formula for calculating surplus income is not complicated, however, there are many reasons why surplus income is something you need to consider carefully before filing for bankruptcy.
- The amount of your surplus income can affect the length of your bankruptcy. If you have surplus income averaging more than $200 per month, not only will you pay more, your bankruptcy will be extended for an additional 12 months.
- It is important to note that surplus income payments are required by law, as outlined by the Bankruptcy and Insolvency Act (BIA). Failure to report your income or make your required payments while bankrupt means that your debts will not be discharged.
- All sources of income, whether taxable or not, are included in the surplus income calculation. This includes your net pay but also includes child tax credits, child support, and pension income. Any of these amounts can increase your average monthly income resulting in your having to pay a surplus income.
- If you experience a month where you receive three bi-weekly paycheques, instead of the normal two, this could be enough to trigger a surplus income payment.
- If you think your income will increase during your bankruptcy, or you expect to receive a bonus, this may cause a surplus income payment, increasing the cost of your bankruptcy.
- To add to the confusion, your trustee won’t make this calculation until you have been bankrupt for seven months creating a lot of uncertainty if your income fluctuates.
How to avoid surplus income
So how can you avoid this surplus income penalty? The answer is to file a consumer proposal.
For you to file a consumer proposal, your creditors must get more than they would recover in a bankruptcy. Your trustee will estimate your surplus income payments and any other realizations from all assets available to your creditors in bankruptcy. Even though you need to offer more money to your creditors than you would in a bankruptcy, your payments can be spread over a period of up to five years.
What a consumer proposal solution does is spread out your surplus income over a longer period and decrease your monthly payments to an amount that is more affordable and within your budget.
Once the creditors agree to the payment terms, that’s it. Even if your income increases, your payments in the consumer proposal are fixed.
Overtime may be mandatory where you work, but you know that in a bankruptcy you are paying half of your overtime to the trustee, so you don’t want to work overtime. A proposal solves that problem since your payments don’t increase if your income increases.
How does this affect the cost of filing a consumer proposal?
As an example, if your surplus income would amount to a bankruptcy payment of $500 a month for 21 months your total cost would be $10,500. You might consider offering a consumer proposal where you pay $200 per month for 60 months, or $12,000. As you can see this makes the cost of filing a consumer proposal slightly more than you would pay in bankruptcy.
Why would you offer $12,000 when bankruptcy may only cost you $10,500? Three reasons:
- First, if your income increases during your bankruptcy, or if you get a tax refund, your bankruptcy could easily cost more than $10,500.
- Second, payments of $500 per month might be a strain on your monthly budget, while $200 per month is easily affordable. So, for you, paying $200 per month for a longer period may be preferable to paying $500 per month for a shorter period.
- In addition to avoiding paying high monthly surplus income, you may have assets you want to keep (such as RESPs, a second car, home equity) that would otherwise be forfeited in bankruptcy.
Also, you can pay off a consumer proposal anytime, so if you do work overtime you can pay extra in your proposal and pay it off sooner.
What you should do next
Try our Surplus Income Calculator to calculate what your monthly surplus income payment might be in a bankruptcy to see if a consumer proposal is an option to avoid high monthly bankruptcy payments.
What is the cure for high surplus income payments in a bankruptcy in Canada? File a consumer proposal.
An initial consultation can determine if you have a surplus income risk and how a consumer proposal might work better for you. To review your situation, book a free consultation with a licensed insolvency trustee near you.