Struggling with debt can leave you feeling overwhelmed, especially if you’re finding it impossible to repay what you owe. If your debt feels too much to manage, you may consider filing for personal Bankruptcy as a form of debt relief, to begin your journey towards a fresh start.
Depending on your income and financial situation, you might be required to make surplus income payments, when filing for Bankruptcy. Surplus income is one component that makes up the cost of Bankruptcy in Canada, defined by the Bankruptcy and Insolvency Act.
Bankruptcy can feel like a daunting process, which is where a Licensed Insolvency Trustee (LIT) can put your mind at ease. All of your Bankruptcy duties and responsibilities will be explained to you by your LIT. They’re the only federally regulated debt advisors in Canada who can offer you advice and support in all areas of debt and insolvency, from credit counselling to Bankruptcy.
Here, we explain what surplus income payments are and how they are determined, so you can feel well informed when deciding on the best debt relief option for your personal situation.
What are surplus income payments?
When you file for Bankruptcy in Canada, you may need to make surplus income payments as part of the cost of your Bankruptcy.
In simple terms, when you file, the more money you make, the more money you must repay your creditors. To do this, the Office of the Superintendent of Bankruptcy sets surplus income thresholds for you and your family, to cover necessary living expenses. Your LIT will use these thresholds to determine if you will need to make surplus income payments in your Bankruptcy, and how much this will be.
Essentially, if you earn over a certain limit, you are required to pay one half of the amount you’re over the limit into your Bankruptcy estate as a surplus income payment. This money is then distributed amongst your creditors.
Why do I need to pay surplus income?
When the government put together the rules and regulations for Bankruptcy, they had to decide how to balance the need to eliminate your debt, with the rights of your creditors who loaned you the money to begin with. That is why surplus income payments were brought in.
Surplus income is made up of three principles:
- The more money you make, the more money you are required to pay while you are bankrupt.
- You’re allowed to keep a portion of your income to cover living expenses (your surplus income limit/threshold)
- Whatever you earn over that amount, you must pay half to your LIT who will then distribute to your creditors.
How much will my surplus income payments be?
To determine whether surplus income payments will apply to you and how much you need to pay – The following link to the table of surplus income thresholds, put together by the Office of the Superintendent of Bankruptcy (OSB) gives you examples of income and payment.
Factors that affect what your surplus income payments will be, include:
- Your monthly income: Over the course of your Bankruptcy, your income will be looked at to decide how much your surplus income payments will be. This includes employed or self employed wages, government benefits, pensions and spousal support.
- The size of your family: Surplus income thresholds are lowest for individuals and become larger for households up to seven or more people.
- Your family’s income: Even if you’ve filed for Bankruptcy individually, your family’s income over the course of your Bankruptcy will be taken into account. The OSB asks that LITs consider the impact that other income earners in your family have on your standard of living.
- Your family’s statutory remittances: LITs will subtract certain unavoidable costs which will reduce the amount that counts against your surplus income thresholds. Examples of this include: income tax, mandatory payroll deductions if you’re self-employed, certain medical costs, interest on debts that are ineligible to be included in your Bankruptcy, child support payments, childcare expenses, court fines/penalties.
Do surplus income payments affect the length of my Bankruptcy?
Surplus income will affect how long your Bankruptcy lasts. If your surplus income each month is more than $200 (meaning you’ll pay your LIT more than $100 in surplus income payments), your Bankruptcy will be extended automatically.
For a 1st time Bankruptcy, it will be automatically extended for 12 months (you will need to pay your surplus income payments for an additional 12 months).
For a 2nd time Bankruptcy, surplus income will extend your Bankruptcy for 36 months.
With surplus income affecting the cost and length of your Bankruptcy, it’s important to discuss your situation with your LIT before you file for Bankruptcy. With their guidance, you can assess all your debt relief options and decide on the best route forward for your financial wellbeing. If your surplus income is more than you can afford each month, you may want to consider a Consumer Proposal as an alternative form of debt relief, which could be more affordable, depending on your situation
Can I avoid surplus income payments?
Surplus income is considered a penalty, because the more money you make, the more you are required to pay into your Bankruptcy. Surplus income can be expensive, so it’s important that you understand it fully before you file for Bankruptcy. You can discuss any concerns you have with your LIT, so you can make an informed decision about whether Bankruptcy is the best choice for your financial situation.
If you’re concerned about surplus income payments affecting the total cost of your Bankruptcy, or have a higher income and want to avoid the surplus income penalty, you may consider filing for a Consumer Proposal where your payments are fixed even if your income changes.
For more information on a Consumer proposal, read about the cost of a Consumer Proposal.
Ready to say goodbye to your debt?
You shouldn’t need to manage your debt alone. Consulting with an LIT can take some weight off your shoulders and bring clarity to your situation. With their guidance, you can decide on the best form of debt relief, to improve your financial wellbeing. Contact us today for a free consultation – we can help.
