Calculating Bankruptcy Payments In Canada

If you’re considering filing for bankruptcy, you must be having serious issues with paying down your debt. Bankruptcy is typically the last resort for Canadians who struggle with their debt and are unable to put a stop to all the collection calls from creditors or threats of lawsuits for monies owed.

However, while bankruptcy can certainly put a stop to these calls and protect you from impending lawsuits, bankruptcy also costs money. While you may be able to eliminate much of your debt through bankruptcy, it’s also important to understand that you’ll still have some financial responsibility while you’re bankrupt.

How Much Do Bankruptcy Payments Cost?

When you declare bankruptcy, your Licensed Insolvency Trustee (LIT) will order you to pay a monthly base contribution toward your bankruptcy estate. Normally, you’ll pay a minimum of $1,800 to file for bankruptcy ($200 a month for 9 months). Afterward, any additional fees will be federally legislated and applied based on your personal situation:

• If you have assets or surplus income that can be declared to your LIT, you may not accumulate any more upfront costs to go bankrupt. 

• If you don’t have assets or surplus income, your LIT will assess your finances and help you negotiate a plan to pay any of your other bankruptcy fees.        

What Affects Your Bankruptcy Payments?

It’s helpful to calculate your bankruptcy payments in order to understand how much you will be paying each month. The amount that needs to be paid on a monthly basis will differ from one person to the next. The payments required generally vary based on family size, monthly income, assets, and expenses.

Base Monthly Payments

Consumers who file for bankruptcy will be obligated to make monthly contributions toward the administrative costs associated with filing bankruptcy.  On average, the cost associated with monthly contributions to cover administrative tasks is approximately $200 per month. The cost is meant to cover a variety of administrative tasks such as counselling sessions, government fees, mailouts, preparing filings for tax returns and hiring a Licensed Insolvency Trustee.

How Long Will You Have To Make Bankruptcy Payments?

If you go bankrupt, discharge occurs automatically once you fulfill any duties imposed by the government. Your payment term depends on how many times you’ve filed:  

• 1st Bankruptcy – 9 months if your earnings aren’t over your designated surplus income limit (which varies based on the size of your household). If you do have surplus income to pay your LIT (for your creditors) that term will last 21 months.  

• 2nd Bankruptcy – 24 months if you don’t have any surplus income and 36 months if you do. 

Surplus Income Payments

Part of your responsibility while in bankruptcy is keeping your trustee informed of your income. You will be obligated to submit income statements on a regular basis so that your income can be tracked. If you earn over a certain amount, you may have to pay surplus income.

The government establishes limits on how much bankrupt consumers are allowed to earn before they are charged surplus income. These limits are based on household size, so the more children are in a household, the higher the limit will be. That’s because the government wants to ensure that families are still able to maintain their lifestyle and pay their associated expenses, particularly childcare.

Here are Canada’s surplus income limits for bankruptcies declared in 2022:

How To Calculate Your Surplus Income Payments?

Surplus income is dependent on your net income, minus certain monthly expenses, such as child care, expenses associated with a medical condition, and penalties imposed by the court. Once that amount is determined, anything you earn beyond that threshold is then considered surplus income. You will need to pay 50% of that amount in the form of surplus income payments.

For example, if you have a spouse and 3 children at home, you’d have a household number of 5 people. Since your family consists of 5 people, your surplus income limit is $4,962 a month.

If your family income is $5,962, you’ll have $1,000 of surplus income. As such, you’ll need to pay half of that amount ($500) to your LIT, on top of your regular contributions. 

How Long Will You Have To Make The Surplus Payments?

Your surplus income payment term also depends on your number of bankruptcies: 

• 1st Bankruptcy – Your payments will usually occur for a minimum of 9 months, but if you go over your surplus income limit, you’ll be bankrupt for 21 months.  

• 2nd Bankruptcy – While your second bankruptcy typically lasts 24 months, exceeding your surplus income limit will lead to a maximum term of 36 months.

• 3rd Bankruptcy – You must return to bankruptcy court, where they’ll decide how long your payments last (which can be more than 3 years with surplus income). 

Do Assets Affect Your Bankruptcy Payments?

When you file for bankruptcy, you may need to surrender many of your assets. While you may be able to keep some assets, you may still be required to give up a certain amount of equity in more valuable assets, such as your car or home.

Every province in Canada has its own set of rules regarding the assets that must be given up when someone files for bankruptcy. You will need to check with your specific province’s guidelines to find out what you can keep and what will have to be given up.

If you owe a significant amount of money toward your creditors, the bankruptcy court may choose to drain the funds from your properties. Assets you could lose include:   

• RRSP – If you have a Registered Retirement Savings Plan, you may lose any contributions you made to it during the 12 months before your bankruptcy.  

• Investments – All your other investments might be seized too, such as stocks, Registered Education Savings Plans (RESP) and Canada Savings Bonds. 

• Home Equity – The court may also take the equity in your real estate properties. In this case, the regulations vary according to your province or territory.

• Car – Additionally, you may lose the title to your motor vehicle. Although the rules vary by region here too, some bankruptcy courts will let you keep an older car. 

Taxes

When it comes to bankruptcy, taxes work a bit differently. Your licensed insolvency trustee will provide you with any pertinent details that are applicable to you. For instance, any tax refunds or HST credits that you would typically get while bankrupt will go to your bankrupt estate.

Other Costs

If you happen to come upon a lump sum of money, whether by winning the lottery, receiving an inheritance, or winning a court settlement, you will probably lose that money too. Such loss of money could be considered some form of bankruptcy payment.

Additional Reading

Divorce And Bankruptcy

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Loans After Bankruptcy

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Everything You Need to Know About Bankruptcy Court in Canada

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Final Thoughts

The fees associated with bankruptcy are similar in every province in Canada, but the rules still differ to some extent. While it may be bothersome to find out that there are fees associated with bankruptcy, the laws surrounding bankruptcy are designed to make sure that the costs are based on your specific situation. If you’re uncertain about which path to take, be sure to get in touch with a trustee to help you determine what your options are.