8. Trustee Calculates Surplus Income

The most mathematically complicated duty that your trustee will be required to perform is to calculate your surplus income.  When the government of Canada created the bankruptcy rules, they had to decide how to balance the need to eliminate your debts, with the rights of the creditors who loaned you the money in the first place.  They decided that the more you make, the more you will be required to pay while you are bankrupt.

That sounds simple enough in theory, but in practice it’s somewhat more difficult.  How does the trustee decide what’s a fair payment?  The government decided on a simple solution: they would allow you to keep a portion of your income (what they decide you need for normal living expenses), and whatever you earn over that amount you are required to pay half to the trustee.

So, in 2011, the government has decided that a single person with no dependants requires $1,926 per month to cover their normal living expenses (rent, food, utilities, transportation, etc.).  If you earn more than that amount, you pay half of the amount you are over as a penalty.

Is that fair?  In some cases, yes it is.  In other cases, perhaps not.  If you live in a big city where the cost of living is higher,  should you be required to pay the same as a person who lives and works in a small town where the cost of living is lower?  Perhaps not, but that’s the way the rules work.

Each month you will be required to send to your trustee copies of your paystubs and other income, and your trustee will then calculate how much you owe.  You can see examples of the calculation in our post on Surplus Income and Bankruptcy in Canada: The Hidden Trap.

At the end of the first six or seven months of your bankruptcy (or after 21 months if this is your second bankruptcy) your trustee will average out your income, and if your average income is more than $200 over the limit set by the government, your bankruptcy will be extended by an additional 12 months, and you will be required to make those surplus income payments for an additional twelve months (21 months in total in a first bankruptcy).

TIP: Before filing bankruptcy, ask your trustee to do a detailed estimate for you of how much you will be required to pay on account of your surplus income.  Be sure to tell your trustee about all of your expected income, including bonuses, overtime, extra pay months, back child support, and so on.

Here’s a video that gives an actual example of surplus income and how it applies in a bankruptcy:

If you expect to have very large surplus income, it may be prudent to avoid bankruptcy and file a consumer proposal instead.