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Based on the Bankruptcy & Insolvency Act, the amount payable is based on factors including how much a bankrupt individual’s family earns above the surplus income limits for 2020, the number of dependents within the household and any eligible expenses that may be deducted. That amount will then be subject to a surplus income payment of 50% payable to the bankrupt consumer’s creditors.

When declaring bankruptcy, the Licensed Insolvency Trustee must receive documentation of the family’s income. The trustee will then calculate the amount that needs to be paid to creditors. The following formula is used:

Net Monthly Income – Eligible Deductions – Income Limit = Surplus x 50% = Monthly Payment

The net income is calculated as the net pay of everyone in the bankrupt individual’s household. Changes in income are reflected in the amount of surplus income that needs to be paid. The general concept is that the higher your income is above the threshold, the more you pay toward your debt and vice versa.

Surplus Income Limits For 2020: An Example

To help you understand the surplus income calculation and concept, let’s take a look at an example. A single person in a household has net pay of $3,000 and eligible deductions of $200. 

Income & ExpensesTotals
Net Income$3,000
  Eligible Deductions-$200
Available Income$2,800
  2020 Surplus Income Limit (Single Person)-$2,243
Surplus Amount$557

The surplus amount in this example would be $557 per month and the bankrupt individual would be required to pay an additional $278.50, 50% of the surplus amount, each month to their debtors.

How Long Do You Have To Pay Surplus Income?

The amount that is paid as surplus income has a large effect on how long bankruptcy lasts. If the average surplus income each month for the first six or seven months of the bankruptcy is higher than $200, or a surplus income payment of more than $100, the length of the bankruptcy extends. 

For a first-time bankruptcy, the bankruptcy term is 9 months. But if the average surplus payments were calculated to be higher than $100, it would be increased to 21 months. This includes the extended obligation for surplus income payments as well.

For a second bankruptcy, the duration would be prolonged from 24 months to 36 months. In the case of a third bankruptcy, the individual in question would need to appear before a bankruptcy court, who would then determine the duration of the bankruptcy period. The term would likely be at least three years if the average monthly surplus income payments exceed $100.

Worried About Surplus Income Limits For 2020

Although the concept of surplus income payments is fairly straightforward, there are several points of concern for bankrupt individuals:

  • If your household earns more than the income threshold and averages more than $200 per month in surplus payments, you will end up paying more money for a longer period of time.
  • All sources of income are included in the calculation of surplus income. This may include non-taxable items such as child support, child tax credits, and pension income on top of your net pay from your employer. 
  • For those that are paid bi-weekly, there may be certain months where they receive three paychecks which could potentially cause a breach of the surplus income limit. 
  • Any increase in income during bankruptcy or potential bonuses may cause a breach of the monthly surplus income limit.

Alternatives To Bankruptcy

One solution to the above points of concern is to file a consumer proposal. A consumer proposal is a legally binding agreement administered by a Licensed Insolvency Trustee to negotiate an agreement to pay creditors a percentage of the debt or to extend the time to repay the debt or both. By negotiating a consumer proposal rather than filing for bankruptcy, the creditors will recover a higher portion of the debt owed to them. Generally speaking, future creditors would view a consumer proposal as more favourable in comparison to a bankruptcy.

Will my bankruptcy affect my RRSP? Learn more here.

Payments for a consumer proposal can be extended for a maximum of five years, with the monthly payment amount determined by the trustee to ensure the debtor’s ability to manage it. These payment figures remain constant, even if the debtor experiences a rise in income or receives bonuses. The debtor has the freedom to settle the consumer proposal amount ahead of schedule if their financial situation improves, offering flexibility. Moreover, consumer proposals provide an avenue for individuals to sidestep personal bankruptcy, preventing the liquidation of their assets.

Bottom Line On Surplus Income Limits For 2020

Understanding the surplus income limits 2020 is crucial to navigating bankruptcy. These limits play a pivotal role in determining the amount you’re required to pay based on income, family size, and eligible expenses. By familiarizing yourself with these thresholds, you can make informed financial decisions and work towards regaining your financial stability and credit.

Frequently Asked Questions

Do I have to provide my spouse’s income for the surplus income?

Your spouse has the option to not disclose their income amount if they are not bankrupt. In that scenario, the family’s surplus income threshold would be reduced to 50% of the standard amount.

Is the surplus income based on my income before or after-tax?

It is calculated based on your net pay which means it’s the amount the individual earns after-tax and mandatory deductions.

What expenses can be deducted?

Eligible deductions are the same as those that are normally deducted when filing income taxes: child support, child care payments, medical bills, fines and penalties, employment expenses and so on as permitted by the Income Tax Act. Another expense is interest paid on debts that were not dischargeable during bankruptcy.
Veronica Ott avatar on Loans Canada
Veronica Ott

Veronica is a writer who specializes in creating unique and educational personal finance content. She has extensive experience writing blog posts for companies in the financial sector. Veronica's background is in accounting as she graduated from Western University in 2017 with a degree in accounting. She is passionate about using her accounting expertise to help others with their personal finance questions and issues and enjoys using her writing to educate Canadian readers. When Veronica is not writing, she enjoys film, reading, travelling, going to the gym, and listening to music.

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