One aspect of bankruptcy in Canada that can be somewhat difficult to understand at first is “Surplus Income”. The way surplus income works is that, basically, the more you make, the more you will need to contribute to your creditors during the bankruptcy process. The Canadian government has developed a formula to determine how much the average family of a specific size needs in order to maintain a basic standard of living. The larger the family, the higher this amount. This standard is protected from creditors. If you make more money, you may need to make surplus income payments during your bankruptcy. When you file for bankruptcy, your trustee will review your monthly income and expenses and determine whether any surplus income must be paid. In addition, you are required to provide your insolvency trustee with income statements and proof of income each month during your bankruptcy. For example, you must submit your pay stubs to your trustee each month as well as receipts for certain specific expenses. The trustee will use this information to calculate your average income. If your net income increases, you will pay more. If your net income decreases, you will pay less. Here are five important points about surplus income that you should know if you are considering filing for personal bankruptcy.
Your Surplus Income Can Determine the Length of your Bankruptcy
Surplus income is one of the main factors that determines the length of your bankruptcy. If your amount of surplus income is less than $100 per month, then you are eligible to be discharged from bankruptcy in as little as nine months (24 months if this is not your first bankruptcy.) However, if your surplus income is greater than $200 per month, the length of your bankruptcy will automatically be extended. This means that you will be required to make surplus income payments for 21 months (36 months if this is not your first bankruptcy.)
The Amount of Exempt Income Changes Each Year
The level of allowable income is set by the government and this amount changes every year. Under the Bankruptcy and Insolvency Act, the Office of the Superintendent of Bankruptcy sets the guidelines for what families are allowed to earn without making surplus income payments. These numbers increase every year to account for inflation and other variables.
More than Your Pay Cheque is Considered
Your trustee takes more into account than just your pay cheque. When calculating the amount of surplus income you will need to pay, your trustee uses the following formula:
Net Income – Income Threshold = Surplus x 50% = Surplus Income Payment
This means that, for example, if you earn $2500 each month (after tax and employer deductions) and you live in a single person family (the 2015 income threshold for a single person family is $2062) then your surplus income is $2500 minus $2062, which is $438. You are required to make a surplus income payment of 50% of that amount, or $219, each month. When calculating surplus income, the monthly income of everyone in the household is taken into account. Deductions such as spousal and child support payments, child care payments, prescription and medical costs, self -employment (or specific work related) expenses, fines, are also reviewed in order to help calculate your net income.
Surplus Income Payments are Required by Law
You are required to report your income and make surplus income payments by law. As mentioned, the Bankruptcy and Insolvency Act sets out how to calculate surplus income. Your trustee is required to report whether or not you make your surplus income payments. If you do not make these payments, you will not be able to be automatically discharged from bankruptcy.
Reporting your Income is One of Your Duties in Bankruptcy
Regularly reporting your income and specific expenses and making surplus income payments, as required, is one of your duties during bankruptcy. Other duties include:
- Updating your contact information with your trustee as needed. If you change jobs, move or get a new phone number, you need to provide this new information to your insolvency trustee.
- Attending two financial counselling sessions. The goal of these sessions is to teach you budgeting and money management strategies that will help you in the future. These sessions will also help you learn how to obtain and use credit following bankruptcy.
As you can see, there are rules set for filing bankruptcy in Canada. Surplus income payments are an important part of the process. Speaking with a trustee will help you understand this process and provide you with information on bankruptcy and other options available to you. All trustees offer a free consultation.
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