Note: the question in this article contains old surplus income limits. Click here to review the updated limits.
Question: If I file bankruptcy in Canada, does the surplus income test apply at the household income level or the individual level when only one party is going bankrupt? If the bankrupt party’s share of surplus household income is below the limit $200 while the total surplus income is above $200, will the process take 9 months or longer?
Answer: Surplus income is based on family income. The more your family earns while you are bankrupt, the more you pay. If your income, on average, is more than $200 over the limit set for your family size, your bankruptcy is extended for an additional year (from nine months to 21 months for a first time bankrupt).
So to use round numbers, if the limit for your family size was $3,000, and the family income was $3,600, that’s $600 over the limit, so the bankrupt would pay a penalty of half of that amount, or $300 per month.
But what happens if there are two people in the family with income?
Here’s a more complicated example:
James and Jill have one child, so they are a family of 3. In 2020 the limit for a family of three was $3,433. (The limits change each year). If total family income was $4,033, the family is $600 over the limit ($4,033 – $3,433), so if both James and Jill are bankrupt, they would pay a total surplus income penalty of $300 per month.
Let’s assume that James earns $1,209.90 per month, and Jill earns $2,823.10 (which totals $4,033 per month). If only James is bankrupt, then only James is required to pay his portion of the penalty. Here’s the math:
- James – $1,209.90 – 30% of total
- Jill – $2,823.10 – 70% of total
Because James earns 30% of the family income, he is required to pay 30% of the penalty. The total surplus income penalty is $300 in this example, so 30% of $300 is $90, so James is required to pay $90. Jill does not have to pay anything, since she is not bankrupt.
According to Directive No. 11R2-2019 on Surplus Income, issued by the Office of the Superintendent of Bankruptcy, if the bankrupt’s total surplus owing is less than $200 per month, they are not required to pay it, and therefore their bankruptcy will end in nine months, if they are a first time bankrupt.
So, the answer to your question is that, in this case, as a first time bankrupt James would be eligible to be discharged in nine months.
As you can see, this is a very complicated calculation, so we strongly recommend that you contact a licensed bankruptcy Canada trustee to review this calculation in detail before you decide to file bankruptcy in Canada.