3 Things to Know about Surplus Income in Bankruptcy

Surplus Income is the name the government has given to the calculation that trustees are required to do when someone files personal bankruptcy to determine what their monthly payments are going to be.  It is a mathematical exercise based on a specific set of rules.  It is not intended to be complicated, but it can be confusing for people unfamiliar with it. There are also options you have to adjust your surplus income payments in a bankruptcy.

The most critical number in the calculation is something called the Surplus income Threshold.  This is the amount of money the government has determined a person needs for a reasonable standard of living in Canada.  The thresholds are published every spring and apply to anyone that has filed for bankruptcy.  The schedule consists of an income number for households made up of 1 to 7 or more people.  The more people that reside in the household, the higher the surplus income threshold.

1) How It Works

The calculation works like this:  the total amount of money coming into the household minus allowable deductions is compared to the surplus income threshold for a household of that size (number of people).  If the total amount coming in to the household minus the allowable deductions is $200 or more over the threshold then there may be an obligation to pay surplus income.

The next step is to determine the bankrupt’s proportional share of the total household income.  The amount we calculated in the preceding paragraph is then adjusted/reduced to show the bankrupt’s share of the excess.  If the bankrupt’s share is $200 or more then there is an obligation to pay surplus income.  The payment is equal to 50% of the bankrupt’s share of the excess.

Confused?  That’s understandable.  The most important thing to remember is to ask your trustee to walk you through your surplus income calculation BEFORE you file for bankruptcy.  You need to understand how this process works because it impacts how much you may be required to pay if you file for bankruptcy and how long your bankruptcy will run.

2) Mediation

If you don’t agree with the calculation that your trustee has prepared for your bankruptcy then you have the right to request Mediation from the Office of the Superintendent of Bankruptcy.  The mediator cannot impose an agreement between you and your trustee.  The mediator’s role is to facilitate discussion and hopefully arrive at a surplus income amount that both sides find acceptable.  Mediation is confidential in that there are no minutes of mediation, only a signed agreement or a declaration that no agreement was possible.  If no agreement is possible the matter is referred to Court to resolve.

Mediation is not used very often because many trustees don’t bother to explain the process to people that file for bankruptcy.  It can be used quite effectively by people that file for bankruptcy and have unusual living expenses that may not fit the government’s guidelines for allowable deductions.  In a mediation, it is possible to negotiate the amount to be paid and unless the matter is referred to Court, the mediated settlement is the amount that will be paid.

3) More Time To Pay

The third thing you need to understand about Surplus Income is that you can ask for more time to pay whatever amounts have been calculated.  Bankruptcy law was written based on the assumption that you will make your surplus income payment every month, but if you are not able to do that you may request more time to pay and negotiate payment terms with your trustee.  A common example is to request an additional 12 or 24 months to make the required payments.  Your payment arrangements will be referred to a mediator, but that is only so that the deal maybe recorded and made binding on both parties.  You will remain in bankruptcy until the total surplus income obligation has been paid, but once an agreement is in place for payment terms your obligation will not change.

There you have it.  You need to know how surplus income is calculated, you need to know that you have the right to disagree with your trustee calculation and request mediation, and you have the right to ask for more time to make the required surplus income payments.