Many individuals who are considering bankruptcy are confused about the need to pay surplus income. Having a “surplus” at the end of the month is often unimaginable, but having money left over after expenses is not what surplus income means in the context of bankruptcy. Surplus income is the requirement to pay creditors half of the surplus amount calculated each month beyond a certain threshold set by the government.
There is a widely held view that bankruptcy gives you complete freedom to walk away completely from your debt. This is true only to the extent that you have no means to pay your debt, currently and in the near future. Once you earn above a set threshold per month, you must make surplus income payments. Paying a surplus income amount in bankruptcy, based on your average monthly net income, is a requirement by law. Your trustee is obliged to report to the court whether or not your surplus income payments were made.
Bankruptcy Rules on Surplus Income
When the government began to formulate the bankruptcy rules in Canada, it was viewed that it would be unfair for creditors alone to absorb the losses from debtors who file for bankruptcy. The government decided that debtors who earn an income beyond a basic amount will have to repay some of their debt, based on their ability to pay. In other words, debtors who can pay back some of their debt will be required to do so.
In creating the bankruptcy rules, the government based surplus income on the following three principles:
- The more your earn, the more you can pay;
- You should be able to keep a reasonable amount to cover normal living expenses (your surplus limit or threshold); and
- Half of what you earn above the threshold can be paid towards your debt.
When you look at surplus income from the perspective of these principles, there is a fairness principle in making a debtor who has some ability to pay greater accountability.
Annual Surplus Income Limits
The Office of the Superintendent of Bankruptcy sets the surplus income limits each year, which increase each year to cover inflation. The thresholds are derived from the low cut-offs (LICO), released by Statistics Canada.
The 2015 Surplus Income Standards are:
Calculating Surplus Income Payments
Each dollar that you earn above the threshold amount is subject to a surplus income payment of 50 percent, such that:
Net income – Threshold = Surplus
Surplus x 50% = Surplus Income Payment
Example: Ben is single and lives alone with no dependants. His net income (after required employer deductions and allowable expenses) is $3,000 per month. The income threshold for a single household family is $2,062. His surplus income calculation is as follows:
$3,000 Net income – $2,062 Threshold = $938 Surplus
$938 Surplus x 50% = $469 Surplus Income Payment
Ben’s monthly surplus income payment would be $469.
Net Income Adjustments
Your net income may be reduced by certain allowable expenses, such as necessary expenses for employment, significant medical expenses, child support and additional income tax payments. You can discuss any financial obligations you continue to have in bankruptcy with your trustee for further consideration.
Disclosure of Non-Bankrupt Spouse’s Income to the Trustee
If you have a spouse that is not filing for bankruptcy, you are obliged to disclose your spouse’s income to the trustee if you are aware of it and your trustee must base your monthly payments on the total family income. If your spouse refuses to divulge his or her income to you or the trustee, then the trustee will still be required to take your spouse’s income into account. Your basic threshold amount will be based on the number of persons living in your household. For example, if you have a family of four, the trustee may determine that one quarter of the standard would be deducted from your income, and half of that surplus amount would be required to be paid to the trustee.
If you can file for a consumer proposal instead of bankruptcy, then you will not have to make surplus income payments. If bankruptcy is your only option, however, then it is important to get help right away.
Proving Your Income and Paying Surplus Income
Each month during your bankruptcy period, you must send your trustee proof of your income (such as your paystub or pay statement) and proof of allowable expenses (e.g., child care, medical expense receipts) and the trustee will subtract your allowable expenses from your income to calculate your net income and determine if any surplus income payments are required. If your monthly income is irregular or fluctuating, your trustee will help to determine your surplus income payment or you can make a lump sum payment. Your average monthly net income is used in calculating your surplus income, so if you have the odd month where you receive three payments instead of two, your average surplus income amount will increase slightly as a result or you can limit the fluctuation in monthly income by paying every two weeks. For example, if you normally pay $400 once per month, you could pay $200 every two weeks, on payday instead.
You will need to make the surplus income payment to your trustee, who will pay your creditors. Or, you can set up with your trustee to pay by pre-authorized payment, so the payment is taken automatically from your bank account on payday. If you accelerate your surplus income payments, there is a potential for you to be completed your payments before the 21 month period is over.
How Long Will I Have To Pay Surplus Income?
If this is your first bankruptcy and your average surplus income is less than $200 per month after seven months, then you may be eligible to be discharged from bankruptcy after nine months if there are no objections to your discharge and you have completed your other duties.
If this is your first bankruptcy and your average surplus income exceeds $200 per month after seven months, then your bankruptcy will be extended by an extra 12 months, from nine to 21 months and you will have to pay surplus while your are bankrupt.
Going back to the earlier example, if Ben’s average surplus income is still $469 at the seven month mark, then his bankruptcy will continue to the end of 21 months. If Ben earns less than $200 surplus income because he is now separated and resultantly required to pay $1,000 per month in child support or he earns less because he can no longer get the overtime he did in the past or he gets laid off from work, then his bankruptcy can be expected to complete at nine months.
If this is your second or further bankruptcy, then the rules are different and the calculation is more complex if you are married and your spouse earns income but is not also bankrupt. Your trustee can do the calculation for you.
If you expect to have high surplus income during your bankruptcy (e.g., you are expecting a high year end bonus) or anticipate getting a raise at work, then you may want to consider a consumer proposal as an alternative to bankruptcy. A consumer proposal involves repaying a set amount to your creditors each month, regardless of how much you earn or how your personal circumstances might change over time.
Contact WBLI Trustees in Bankruptcy in New Brunswick and Nova Scotia
If you have more questions about surplus income or you are considering filing for bankruptcy, contact our bankruptcy trustees at WBLI. We have fourteen locations to help you with bankruptcy in Nova Scotia and we are growing, with three locations to help you with bankruptcy in New Brunswick. Call us at WBLI today at 1-800-495-5909.