In Canada, part of the bankruptcy process is making payments to creditors for the duration of your bankruptcy. Given the financial turmoil of individuals going through a bankruptcy, the Canadian government has set payment regulations for bankrupt individuals, otherwise known as surplus income limits. Surplus income limits take into account that bankrupt Canadians still need to afford a standard of living. Bankruptcy payments are only paid when a household makes money over a certain threshold. If you’re planning on going bankrupt or already in the bankruptcy process, it is helpful to understand what surplus income is, how the government determines the surplus income limits, and how long you’ll be required to make payments.
Everything you need to know about bankruptcy court in Canada, check this out.
What is Surplus Income?
One of the components of Canadian bankruptcy costs is surplus income. The concept behind surplus income is the more money you make, the more you will pay toward your bankruptcy. The Canadian government determines how much you will have to pay and how long you have to make payments through surplus income thresholds. The surplus income amounts are set to ensure that an individual or family can reasonably maintain a standard of living in Canada. What is not considered in surplus income amounts is where you live. The amounts set by the government are a national standard.
Surplus Income Limits for 2019
Below are the surplus income limits set by the Canadian government for 2019. Every dollar an individual or family makes over the threshold amount is subject to a 50% payment while the individual is bankrupt. This means that if a family of 3 makes $4,000 in a month, they have a surplus income of $628 ($4,000 – $3,372). Of this amount, 50% must be a bankruptcy payment which works out to be $314 ($628 x 50%).
|Family Size||Monthly Income Threshold|
|7 or greater||$5,831|
How Are the Income Limits Set?
The surplus income limits are set using the Bankruptcy and Insolvency Act. The required considerations when setting the limits are defined in the Bankruptcy and Insolvency Act as follows:
- How many dependents are in a household
- How much a family earns in a month
- The extent of expenses you are eligible to deduct for tax purposes
The Bankruptcy and Insolvency Act considers that your monthly income won’t always be consistent. For example, you may be sick in a month and make less than usual or you may work overtime in a month and make more than usual. Your surplus income is calculated each month to consider the fluctuations in your income. When you are bankrupt, you send proof of all your income for a month, including pension, unemployment insurance among other income sources, to your Licensed Insolvency Trustee.
Finally, the Bankruptcy and Insolvency Act considers mandatory expenses as well. These expenses could include child support payments, medical bills, fines, penalties, and any other expenses that you would deduct in relation to your income taxes. Once these expenses have been deducted against your income, your Licensed Insolvency Trustee will use the net income amount to determine your bankruptcy payment.
To learn how winnings, gifts, and inheritance are treated during bankruptcy, click here.
How Long Will I Have to Pay Surplus Income Payments?
How long you make surplus income payments depends on your average surplus income. The magic number is $200 gross surplus income or $100 surplus income payment. If your surplus income payments are above $100 on average, your bankruptcy will be extended by 12 months from the original 9 months. If your surplus income payments are below $100 on average, you may qualify to be discharged after 9 months, given that you have satisfied all your bankruptcy duties and obligations.
The above is true for individuals going through their first bankruptcy. If you’re going through a second bankruptcy, the guidelines differ. The calculation of surplus income payments is more complex too, particularly if you’re married. If you’re going through your second bankruptcy, reach out to your Licensed Insolvency Trustee to learn more about how your surplus income payments are calculated and how long you can expect to be bankrupt.
Video: Bankruptcy Explained
Consumer Proposal as an Alternative to Bankruptcy
A big part of being bankrupt is making your surplus income payments to your creditors. Part of this process is submitting your monthly income and expense information to your Licensed Insolvency Trustee. With a consumer proposal, you are only required to submit this information once. At that point, your monthly payment is set and is not subject to change or the rules of surplus income limits. There are other advantages to consumer proposals too, such as generally lower monthly payments and more control over your assets.
As with any personal finance decision, there will be corresponding advantages and disadvantages to all your options. A consumer proposal may be ideal for some individuals but bankruptcy may be favourable to others. Or, neither may be the right option, perhaps some counselling sessions and budgeting is the best solution. The decision you make all depends on your financial situation and future financial goals. Be sure to consider those factors when making a decision.
Is a consumer proposal the right choice for you? Check out this article to learn more.
If you’re considering going bankrupt or in the process of bankruptcy, it is important to understand the rules and guidelines of surplus income payments. After all, you’re the one making the payments to creditors and you have a right to know all the information. If you’re looking for additional information about filing for bankruptcy in Canada, check out all our bankruptcy articles.
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