Surplus Income and Bankruptcy in Canada: The Hidden Trap


Category: Cost of Bankruptcy

Note: This article has been updated to reflect the new 2014 surplus income limits.

Surplus IncomeOne of the most important concepts to understand before you file bankruptcy in Canada is surplus income.  Here’s the concept:

The more you earn, the more you are required to pay while you are bankrupt.

The concept makes sense.  If you are a doctor earning $200,000 per year and you went bankrupt because you had bad investments and got stuck with $1 million in debts, it’s only fair that you contribute more to your creditors during your bankruptcy than someone who earns minimum wage.

There are two key concepts that you must understand regarding surplus income:

  1. The government sets a limit on what you can earn each month, after tax. If you earn more than your limit, you are required to pay half of the amount you are over the limit. If your limit is $2,014 per month and you earn $3,014 per month, you are $1,000 over the limit, so you are required to pay $500 per month.
  2. If your average income is more than $200 over the limit, your bankruptcy is automatically extended for an extra year, and you are required to make those surplus income payments each month for an extra year.

In summary, the more you make the more you pay, and the longer you are required to make the payments. Let’s review these calculations in more detail.

How do the surplus income rules work ?

The government sets a threshold for what you are allowed to earn each month, based on the size of your family.  Here are the limits set for 2014, based on your family size:

Family Size Limit
1
$2,014
2
$2,508
3
$3,083
4
$3,743
5
$4,245
6
$4,788
7
$5,331

Here’s an example of how the calculation works:

Joe is single, with no dependents. He earns $400 per week. In a typical four payday month he earns $400 x 4 = $1,600 after tax. He is allowed to earn $2,014, so Joe is below the surplus limit, so he is not required to make any “surplus income” payments to the trustee during his bankruptcy.

But what if Joe’s income is higher?

Joe is single, with no dependents. He earns $620 per week. In a typical four payday month he earns $620 x 4 = $2,480 after tax. He is allowed to earn $2,014, so Joe is $466 above the surplus limit, so he is required to make a “surplus income” payment to the trustee of half of the amount he is over, or $233. At the end of the first seven months of Joe’s bankruptcy, the trustee averages Joe’s income. Some months he worked overtime and earned more; in two months he received five paycheques (because he gets paid on Friday and there were five Fridays in the month); in some months work was slow and he did not work a full week. After averaging all of Joe’s paycheques, Joe’s average pay per month for the bankruptcy was $2,614 so his average surplus income was $600 over the limit, requiring him to pay $300 per month. A normal first time bankruptcy lasts for nine months, but because Joe’s income was more than $200 over the limit (it was $600 over the limit), Joe will be bankrupt for an extra year, and he will be required to pay $300 per month for a total of 21 months.

Joe’s case is a good illustration of the two key concepts to understand when determining how much surplus income you are likely to be required to pay if you file bankruptcy in Canada: you pay half of the amount you are over the limit, and if your income is more than $200 over the limit you are required to make those payments for a total of 21 months in a first time bankruptcy.

So, before you decide to go bankrupt, ask your trustee to estimate your surplus income payments. Be sure to tell them if you are expecting overtime, or a bonus, because that will increase your average monthly pay. Of course you also want to be sure that they take into account your extra pay months (five pay months if you are paid weekly, or three pay months if you are paid bi-weekly), because again that will increase your earnings.

If you don’t do the math before you start, you might be expecting a nine month bankruptcy, but could end up with a 21 month bankruptcy, with much higher payments.

Avoid The Trap – Consider Your Alternatives

If you expect your income will be increasing, you would be wise to avoid this surplus income penalty and file a consumer proposal instead, because in a consumer proposal your payments are fixed, so even if your income increases, you payments stay the same. Whether or not a consumer proposal or bankruptcy is the correct solution for you will depend on many factors, including your expected income during the bankruptcy period.

The calculation of surplus income can be quite complicated. We strongly recommend you talk to a Local Bankruptcy Canada Trustee to see what your surplus income payment might be, before you file for bankruptcy.