The most confusing concept when you file bankruptcy in Canada is surplus income.
When the government 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. To be fair they came up with something called surplus income.
The government based their surplus income solution on three main principles:
- they decided that the more you make, the more you will be required to pay while you are bankrupt.
- they would allow you to keep a portion of your income that they felt was reasonable to cover normal living expenses (your surplus income limit or threshold), and
- whatever you earn over that amount you are required to pay half to the trustee.
The Office of the Superintendent of Bankruptcy sets the surplus income limits each year. The larger your family the higher the limit – in other words the more of your income you can keep. These limits are increased each year to cover inflation. Here are the surplus income limits for 2015.
What this all means is that a person who earns $100,000 per year who had to go bankrupt should have to pay more while he is bankrupt than someone who is only making $20,000 per year. In addition someone who has 3 children should be allowed to keep more of their income for living expenses than someone who is single.
Each month you are required to submit proof of your earnings, child support, child tax credit and other cash inflow to your trustee. If you earn over the threshold limit set by the government, you pay a penalty of half the amount you are over.
Here’s a simple example:
George Smith is single, with no dependents. He earns a salary of $2,662 per month after tax. The threshold for a single person is $2,062 per month, so George is $2,662 – $2,062 = $600 per month over the limit. The penalty he is required to pay is half of that amount, or $300
In this example George’s surplus income is $600 per month, and his surplus income payment is $300 per month.
How about a married couple:
Joe and Jane are married, and they have two children. They are both filing their first bankruptcy. Their combined average monthly net earnings are $5,831. The surplus income limit for a family of four is $3,831, so they are $2,000 above the limit. That means they are required to pay $1,000 per month while bankrupt (half of $2,000). Because this is a first bankruptcy and their earnings are more than $200 over the limit each month, they will be bankrupt for 21 months, and they will be paying $1,000 per month for 21 months in surplus payments.
If you would like to know your potential surplus income payment try our surplus income calculator.
How Long Do You Pay This Penalty?
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 is extended for 12 months.
- A first time bankruptcy lasts for a minimum of 9 months, but if you are over the earnings limit you are bankrupt for 21 months.
- A second time bankruptcy lasts for a minimum of 24 months, but if you are over the earnings limit you are bankrupt for 36 months.
- In a third bankruptcy you are required to go to bankruptcy court, and the bankruptcy court will decide how long you are bankrupt (quite possibly for more than three years if you have excess earnings).
What else do I need to know about how this works and bankruptcy in Canada?
Three key points:
- First, surplus income is based on your net income, after taxes. It’s the bottom number on your pay stub, after deductions for items that you have no control over (what a trustee calls “non-discretionary” items), like deductions for taxes, CPP, EI, and union dues. You are not permitted to deduct “discretionary” items that you can control, like RRSP contributions or Canada Savings Bond purchases.
- Second, all types of cash inflows each month are included. It’s not just your paycheque that counts; all sources are included, including child support, spousal support, child tax credits, universal child tax credits, CPP, OAS, and all other forms of pensions.
- Third, your earnings are reduced by other non-discretionary expenses that may not necessarily appear on your paycheque, such as court ordered child support or spousal support, or medical expenses that you are required to pay. Your trustee can explain in more detail what is deductible.
This seems complicated; is it?
Your trustee will calculate your surplus income; all you really need to understand is what your limit is, so you can estimate the cost of your bankruptcy.
Since surplus income can be quite complicated, we strongly recommend you talk to your Local Bankruptcy Canada Trustee to fully understand what your surplus income will be and how it will affect your bankruptcy.