Do You Know The New Surplus Income Limits For 2020?

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 threshold, 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.

If filing for bankruptcy, it is requested that proof of the family’s income be submitted to the Licensed Insolvency Trustee. 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.

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. 

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 normally 9 months but would be increased to 21 months if the average surplus payments were calculated to be higher than $100. This includes the extended obligation for surplus income payments as well. 

For a second bankruptcy, it would be extended from 24 months to 36 months. In the event of a third bankruptcy, the bankrupt individual would be required to go to bankruptcy court where they will determine the length of the bankruptcy. The term would likely be at least three years if the average monthly surplus income payments exceed $100.

Worried About Surplus Income?

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. 

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.

Consumer proposal payments can be spread out over a term of up to five years and the trustee will determine a monthly payment amount that is manageable for the debtor. Additionally, payment amounts are fixed regardless of any increase in income or bonuses. As the amount owed in a consumer proposal can be paid off at any time, it gives the debtor the flexibility to pay it off early if their financial standing and cash flows improve. Consumer proposals also allow an individual to avoid personal bankruptcy where their assets would be liquidated.