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You might have heard that you’re required to pay “surplus income” during your bankruptcy. But what does that entail? In this guide, you’re going to learn what bankruptcy surplus income payments are, how they’re determined, and more.
What Is Surplus Income?
Surplus income payments ensure that individuals who declare bankruptcy and have sufficient income contribute to paying off a portion of their debt.
In simple terms, surplus income is the amount of income a person who has declared bankruptcy has that is over and above what they need to maintain a reasonable standard of living. The more money you earn, the more you pay for the benefit of your creditors.
The amount the individual has to pay is calculated according to standards established by the Office Of The Superintendent of Bankruptcy Canada. The Canadian government established various surplus income thresholds to what a person or a family can make in order to maintain a reasonable standard of living.
Whatever the individual or their family make above the level set by the government will be subject to a surplus income payment of 50% while they remain bankrupt.
Surplus income also determines how long the bankruptcy will last. If the individual pays more than $200 in surplus income each month, their bankruptcy is automatically extended for 12 months if the individual is going through their first bankruptcy, or for 36 months if the individual is at their second bankruptcy.
These surplus income rules apply in all bankruptcies, no matter where you live.
How Is Surplus Income Determined?
Canada’s Bankruptcy & Insolvency Act defines how surplus income is calculated. This determination takes into account every individual’s circumstances. Your monthly payments and whether you will have to make surplus payments or not depend on:
- How much you and your family earn every month.
- How many dependents are in your family.
- The cost of eligible expenses you may deduct.
Simply put, you are allowed to earn how much you can, but if you earn more than a certain amount (the surplus income threshold), you have to give something back to your creditors.
The government determines how much you make based on the income proof you send to your Licensed Insolvency Trustee (LIT). During your bankruptcy, you have to send copies of your pay stubs, as well as proof of any other income you may have (pensions, alimony, unemployment insurance, etc.) to your LIT on a monthly basis.
Your LIT calculates how much you are required to contribute to your estate based on your monthly income. If you are off sick, you may be required to pay less. On the other hand, you might be required to pay more when you work overtime, and so on.
How Is The Surplus Income Payment Calculated?
Surplus income payment is calculated using the following formula:
Your Net Income - Threshold = Surplus x 50% = Surplus income payment
We can use the formula in the following example:
Anne lives alone and her take home pay is $3,802 per month. The Superintendent’s standard for a family of one is $2,243. So her surplus income would be:
$3,802 - $2,243 = $1,559
In this case, her surplus income payment would be:
$1,559 x 50% = $779.50
In this example, Anne would have to pay $779.50 in surplus income payments each month that she is bankrupt. Every time she submits her paystubs, her monthly payment is recalculated. If Anne’s pay increases, she will have to pay more. If she cannot work several days due to being off sick and her income drops, Anne’s payments will decrease.
The amount of surplus income payments you are required to make is based on:
- Net Income – This includes the take home pay of everyone sharing the household with the bankrupt. Using our previous example, if Anne had a husband, his income would have been added to Anne’s to determine their household’s income.
- Deductions – This includes support payments, medical bills, child care payments, fines and penalties, or any other expense you would normally deduct when calculating your income taxes. Using our previous example, if Anne would have to pay $600 for medical bills in one month, her surplus income would have been $1,559 – $600 = $959.
- Threshold – The Office of the Superintendent of Bankruptcy sets the threshold according to how many people are living in the bankrupt’s household. In our example, If Anne would have had a husband, his income would have been added to Anne’s to determine their household income, but their threshold would have been increased from $2,243 to $2,793.
- Payment – If multiple individuals contribute to the household’s net income, the required payment is determined for each person based on their contribution to the total. Using our previous example, if Anne’s husband would have contributed to 40% of the household’s net income, Anne’s required payment would represent only 60% of the household’s surplus income.
Get Help With Your Surplus Income
Surplus income can affect the total cost and length of your bankruptcy. Our Licensed Insolvency Trustees can help you determine your required surplus income payments.
Keep in mind that your LIT is required to report to the Court whether you made your surplus income payments or not. If you fail to make your payments, you won’t be discharged from bankruptcy.
Book a free consultation with one of our Licensed Insolvency Trustees to find out more about surplus income payments.