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Many Canadians have trouble keeping up with bills. Credit card debt, student loans, child care, and rent all add up, along with countless other expenses the average person faces. Just in 2021 so far, 15,598 Canadian individuals, businesses, corporations, and other entities filed for bankruptcy.

Governed under the Bankruptcy and Insolvency Act, bankruptcy is often a last resort that provides financial relief to Canadians with immense debt burdens. Bankruptcy ends the collection calls, legal actions by creditors, and uncertainty around one’s debts. When someone declares bankruptcy, all of their assets, property, and accounts are managed by a Licensed Insolvency Trustee (LIT). The trustee distributes cash from assets to creditors as entitled, and handles other administrative aspects of the bankruptcy filing. But, bankruptcy has a few conditions, rules, and regulations that anyone considering bankruptcy should be aware of.

What Is Surplus Income In Bankruptcy?

Each month, you probably have a set amount of money that takes care of all your basic expenses, and anything else necessary to live reasonably. Anything extra is just gravy. The name of that gravy in bankruptcy is surplus income. In bankruptcy, surplus income is a bankrupt person’s extra income remaining after maintaining a reasonable standard of living. 

Canada has rules for surplus income in bankruptcy. Part of the trustee’s job is to determine whether or not the bankrupt has surplus income. The trustee examines the bankrupt’s accounts and assets, as well as any changes in the bankruptcy’s financial scenario. If a bankrupt individual has surplus income, they will usually need to pay more money in their bankruptcy. 

Every year, the Canadian government establishes monthly surplus income thresholds for maintaining a reasonable standard of living in Canada. If a bankrupt person earns surplus income, they must pay an extra 50% on every surplus dollar throughout their bankruptcy. The surplus income threshold varies, however, depending on the size of the bankrupt individual’s family. 

Find out everything you need to know about bankruptcy court in Canada.

Bankruptcy Surplus Income Limits 2021

Below are the bankruptcy surplus income limits for 2021. If a bankrupt is the only member of their family or household and earns more than $2,248 each month, anything extra is considered surplus income. If a bankrupt is one of two members of their family and earns more than $2,799 per month, anything extra is considered surplus income. 

Family Size/HouseholdThreshold (Dollar amount needed to maintain a reasonable standard of living)

How To Calculate Your Bankruptcy Surplus Income Payments?

The Bankruptcy and Insolvency Act dictates how surplus income thresholds are calculated. A bankrupt’s dependents, monthly income, and deductible expenses are all accounted for in deciding whether or not the bankruptcy pays surplus income, and for how long. 

The amount of surplus income a bankrupt must pay depends on the following:

  • Net income, which includes the income of everyone in the bankruptcy’s household; 
  • Deductions, which include most tax deductions like child care payments, fines, employment expenses, and medical bills;
  • Threshold, which sets the limit one can make before having to pay surplus income; and
  • Payment, which is prorated to each person in a household based on their income’s portion of the total income. 

Here’s the formula for calculating monthly surplus income payments: 

Net Income – Threshold = Surplus Income

Surplus Income X 50% = Surplus Income Payment

For example:

Arjun lives with his only daughter, and his monthly income is $3,000 per month. 

He has: $3,000 – $2,799 = $201 of surplus income, therefore he will pay: $201 X 50% = $100.50 each month.

So, if Arjun declares bankruptcy, he must pay $100.50 in surplus income payments each month throughout his bankruptcy. That number could decrease or increase depending on whether or not his financial situation changes. 

Find out what happens to your house when you file for bankruptcy.

What Happens If Your Income Decreases During Your Bankruptcy? 

If your income decreases during bankruptcy, you might be able to pay less in surplus income payments, or not pay any surplus income payments at all. Your average income is taken in the 8th month of your bankruptcy to assess surplus income requirements. 

Here’s an example:

Jessie lives alone and makes $2,500 per month. For the first 4 months of her bankruptcy, her surplus income was $252 per month, which made her surplus income payments $126 per month. 

In her fifth month of bankruptcy, Jessie’s income decreased to $1,500 per month. In month 8, here’s the average of Jessie’s income for the year. 

$10,000 ($2,500 X first 4 months) + $4,500 ($1,500 X last 3 months) = $14,500

Average = $14,500/7 = $2,071

Since Jessie’s average income is now below the surplus income threshold for 2021, she won’t have to make any surplus income payments. Once this happens, the bankrupt is entitled to an automatic discharge by the end of the 9th month.

Bottom Line On Surplus Income Limits In 2021

Bankruptcy is sometimes the best option for someone falling behind on their debt obligations. However, surplus income thresholds exist to ensure fairness in the bankruptcy process. If you’re in debt and you have surplus income, it’s only fair that a portion of it goes to your creditors. 

Bankruptcy Surplus Income For 2021 FAQs

Why do I have to pay bankruptcy surplus income payments?

Surplus income payments ensure a bankrupt fairly contributes to their debts if they have sufficient income to do so.

How long do I have to pay bankruptcy surplus income payments?

You must pay bankruptcy surplus income payments for 21 months on your first bankruptcy. For subsequent bankruptcy, you might have to pay them for a longer period of time. Additionally, a change in financial scenario might decrease your surplus income payments or remove your responsibility to pay them entirely.

Chrissy Kapralos avatar on Loans Canada
Chrissy Kapralos

Chrissy is a Toronto-based communications advisor. With an English degree from the University of Toronto and editing courses under her belt from Ryerson University, she has continued her lifelong passion for writing and editing. In addition to working for Loans Canada on a variety of financial topics, Chrissy has a few years of resume writing and editing under her belt, and takes great pleasure in helping people find work that fits with their experience and passions. When she isn't working, you can find her practicing yoga, hanging out with her dog, reading up on financial and real estate news, or planning her next trip abroad.

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