Will I Have To Make Surplus Income Payments If I Go Bankrupt?

Will I Have To Make Surplus Income Payments If I Go Bankrupt?

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated December 21, 2022

During your bankruptcy process, you may be required to pay surplus income payments. These payments are meant to ensure that creditors get as much of their money back as possible, without harming the standard of living of the person who is bankrupt.

Surplus income payments are completely dependent on your income; therefore everyone’s experience will be different. Simply put, the more money you make during your bankruptcy, the higher your surplus income payments will be.

What Is Surplus Income? 

The Government of Canada regulates the bankruptcy process at all levels, including whether an individual has to make surplus income payments and how much those payments will be. The government isn’t looking to take away 100% of a bankrupt person’s income. They have created income thresholds that ensure people who declare bankruptcy are able to maintain a reasonable standard of living while still contributing to the repayment of the debts.

Each year the Superintendent of Bankruptcy sets new income thresholds based on income statistics collected by Statistics Canada. If you’re in the process of filing for bankruptcy or are thinking about it, your Licensed Insolvency Trustee will be able to tell you what the thresholds for this year are.

Do You Have To Pay Surplus Income?

During your bankruptcy, you will be required to submit to your Licensed Insolvency Trustee a monthly statement of your income and your expenses. This statement is basically a list of any and all money coming into your household during a one-month period, including:

  • Your paycheques
  • Any support payments you receive (ex. child support)
  • Child tax benefits
  • Any other money/ income coming in during the month (ex. rent from tenants)

You’ll also be required to submit a list that details how this income was spent during the month. This information will be used by your LIT to calculate surplus income payments if you need to make them.

How Much Surplus Income Will You Have To Pay?

The amount of surplus income you must pay depends on a few factors, including the following:

Net Household Income

The take-home pay – which is your gross pay less any income taxes, benefits, and deductions – of your entire household is taken into account. That means the incomes of all people living in your home will be added to your income to determine the total household income. 

Deductions

Any deductions to your income will also be factored in, which will reduce the amount that counts against your surplus income threshold. These can include any of the following:

  • Support payments
  • Child care payments
  • Medical bills
  • Fines 
  • Employment expenses

Income Threshold

The Office of the Superintendent of Bankruptcy establishes your income threshold. This is based on the number of people living in your home. 

If your household’s income is more than the threshold for your family size, you’ll need to make surplus income payments. The payment will be equal to 50% of the excess amount, adjusted to the share of your household income.

How Do You Calculate Your Surplus Income Payments?

To figure out if you’ll be required to make surplus income payments you’ll need to input your income into the following equation:

  1. Net monthly income – 2022 Income Threshold (based on # of family members) = Surplus 
  2. Multiple your surplus amount by 50% (0.50)
  3. The amount you get is equal to your surplus payment

Surplus Income Payment Example

If an individual has a net monthly income (the amount he takes home after taxes) of $2500, their surplus income payment would be $72.5. 

Using the equation from above, the surplus amount is calculated as follows: 

$2,500 –$2,355 (income threshold – varies by family size)  = $145 x 0.5 = $72.5

To learn more about the income threshold limits, please visit the Government of Canada website.

What’s Considered Surplus Income?

All sources of incoming cash are considered income and can affect your surplus income payments. Income from child or spousal support, CPP, OAS, and various types of pensions can also affect your surplus income payments.

Do note, surplus income payments are based on your after-tax income after all deductions have been subtracted from your gross pay, as mentioned. Deductions include CPP and EI contributions, income taxes, and union dues. These do not include discretionary items that you have control over, such as RRSP contributions.

How To Reduce Your Surplus Income Payments

The more you earn, the more money you’ll need to pay toward your bankruptcy. Any surplus income you earn will make your bankruptcy more expensive, which is why you’ll want to look for ways to minimize your surplus income payments. One way is to deduct “non-discretionary” expenses, such as the following:

  • Spousal support 
  • Child support
  • Child care expenses
  • Eligible medical expenses
  • Court-ordered fines 
  • Eligible employment expenses 

If you have any one of the above non-discretionary expenses, inform your Licensed Insolvency Trustee to have these items deducted from your surplus income payments.

How Long Will You Have To Pay the Surplus Income Payments?

You’ll continue to make surplus payments throughout your bankruptcy. The length of your bankruptcy depends on the number of bankruptcies you’ve filed:

  • First-time bankruptcies: Minimum of 9 months, or as long as 21 months if you have to make surplus income payments. 
  • Second-time bankruptcies: Minimum of 24 months, or as long as 36 months or more if you make more than your earnings threshold. 
  • Third-time bankruptcies: You must attend bankruptcy court, which will determine how long your bankruptcy will be. 

Bankruptcy Surplus Income Payment FAQs

What happens if my income increases?

If your average income increases by at least $200 or more over your surplus income threshold before the discharge date, you’ll need to make surplus income payments for another 12 months before your discharge.

What happens if my income decreases?

If your income dips at some point in your bankruptcy, there would be no change. You wouldn’t be eligible for an earlier discharge or a refund for any amount you’ve already paid.

When will I be discharged from bankruptcy?

For a first-time bankruptcy, you’ll be discharged a minimum of 9 months after filing, or as long as 21 months if you earn over the surplus threshold. For a second-time bankruptcy, you’ll be discharged a minimum of 24 months after filing, or as long as 36 months or more if you earn over the surplus threshold. And for a third-time bankruptcy, the bankruptcy court will decide how long your bankruptcy will be.   

What happens if my income increases 1 month before discharge?

If your earnings increase the month before your discharge, you’ll be subject to a surplus income payment. 

Do I have to make surplus income for the 9 months plus 21 months?

No, before your discharge date, your LIT will calculate your average income and if it is determined that you must make surplus income payments, you’ll be required to make the surplus income payments for 12 extra months. 

Finding The Right Trustee

Working with the right trustee will make sure your bankruptcy process goes as smoothly as possible. If you’re looking for an experienced and trusted Licensed Insolvency Trustee, Loans Canada can connect you with one in your area.

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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