‘What is surplus income in bankruptcy?’ is a very common question asked by people looking for debt relief solutions. How can you have a surplus in income when there is not enough income to cover all those expenses in the first place? Surplus income is a part of the cost of bankruptcy in Canada. Essentially, the more income you bring in, the more bankruptcy will cost you.
What is surplus income?
Surplus income is a calculation established by the government based on household income and the number of people within that household. The Canadian government has set net monthly thresholds for a person or a family to maintain a reasonable standard of living in Canada. How much you will have to pay in a bankruptcy, and how long you have to pay, is determined by these rules. Your Licensed Insolvency Trustee will use this calculation to determine if you are required to make payments into your bankruptcy, and how much this will be. During bankruptcy, you will be required to provide proof of income on a monthly basis in order for your trustee to ensure the appropriate amount is paid.
How do you calculate surplus income?
Surplus income is different for each and every person, based on their circumstances. It is based on the following criteria:
- The monthly income of you and your family
- The number of dependents in your household
- The amount of deductible expenses you have
You are therefore allowed to earn a certain amount within the surplus income threshold. Any more than this, and an amount is added into your estate. A simple example is Joe Smith, who is married – his wife currently does not work. Joe takes home $3000 per month, after taxes.
The calculation would be as follows:
Total household income $3,000
Less: government standard for 2 people $2,508
Excess over the threshold $492
Surplus income rate to pay is 50% over the threshold $246
Therefore, Joe is required to pay $246 per month for 21 months, (if there are no prior bankruptcies) for a total of $5,166. This is provided the household income does not change within that time. If Joe’s wife starts working, the calculation would be adjusted accordingly.
Surplus income limits in Canada
In a bankruptcy, for every dollar made above the government threshold is subject to a surplus income payment of 50%. Here is the income threshold based on household size:
*2020 surplus income limits set by the Office of the Superintendent of Bankruptcy Canada
Does surplus income affect how long my bankruptcy will last?
Surplus income has an impact on the total cost and length of your bankruptcy. If the payments are not made, you will not be discharged from bankruptcy and will not be able to enjoy life after bankruptcy. Generally speaking, if your surplus income is greater than $200 each month, your bankruptcy will be extended automatically. For a first time bankruptcy, this will be for an additional year, and for a second bankruptcy with surplus income, this will be for an additional three years. Due to the additional impact that surplus income can have on bankruptcy, it is a good idea to discuss your debt relief options with an experienced Licensed Insolvency Trustee. They can suggest a bankruptcy alternative like a consumer proposal to lower your payments.
What if my surplus income payments are too expensive?
It is important to understand these calculations if you are thinking of filing bankruptcy. Sometimes, the requirement to pay surplus income can be more than some households can afford to pay monthly. This may then lead to your bankruptcy being extended to a longer time frame in order to pay the required amount. A better solution may be to file a consumer proposal that will tailor payments to fit your household budget. A consultation with a Spergel Licensed Insolvency Trustee will explain this process and your debt relief options to make the right choice to fit your situation.
If you are unsure about the implications of surplus income, it is best to speak to a Licensed Insolvency Trustee. They can walk you through bankruptcy and alternatives that may suit you better. Contact an experienced Spergel trustee by calling 310-4321, visiting our nearest location for a free consultation, or completing our free assessment form online.