What is surplus income, and how does surplus income affect me during a Bankruptcy?

Many Canadians are struggling with debt — and Bankruptcy is a legal process to help regain control over your financial future. However, there is still a lot of stigma around Bankruptcy, which prevents many from asking a Licensed Insolvency Trustee (LIT) for help or understanding what happens during the process.

If you are feeling overwhelmed by debt and considering filing a Bankruptcy, it’s crucial to understand what the term surplus income means and how it impacts you. Let’s review what happens during a Bankruptcy and how surplus income affects the process.

What is surplus income?

Section 68 of the Bankruptcy and Insolvency Act (BIA) defines surplus income as the portion of your net monthly income that exceeds a certain income threshold amount set by the Office of the Superintendent of Bankruptcy (OSB). These thresholds are known as the Superintendent’s Standards and are based on family size and cost-of-living standards.

This helps ensure that bankrupt individuals contribute to their debts if possible while still maintaining a reasonable standard of living for themselves and their dependents. When an individual files a Bankruptcy, the LIT reviews their net monthly income. You will be required to pay a percentage of that surplus to the LIT if your income is higher than the threshold amount, which forms a dividend that is paid to your creditors.

How can surplus income affect the timeline of a Bankruptcy?

The length of a Bankruptcy is based on your income level, which is monitored and reviewed at certain stages during the Bankruptcy period. Your surplus income payment will increase if your income increases during the Bankruptcy period due to a new job, overtime, or other factors.

Surplus income payments are also reviewed when you have communicated a material change in income to the LIT. These payments will then be adjusted to match your financial circumstances in accordance with the Superintendent’s Standards. If your income decreased during a Bankruptcy, your surplus income payments would also decrease or be eliminated. This makes it important to keep your LIT updated about any changes to your income.

Having surplus income may lengthen the period of your Bankruptcy and result in you having to make payments toward your debts. However, this trade-off is invaluable as it helps you become debt free within a realistic timeframe. It is important to understand and manage your surplus income obligations so you can navigate your debt relief options and make an informed decision. If you are not sure how surplus income may affect you, contact an LIT for more information.

Understand your options

It is also important to understand that you may have other debt relief options. Filing a Consumer Proposal can help you settle your debts if you are concerned about the impact of surplus income requirements.

A Consumer Proposal is a new agreement with your creditors to pay back a portion of what you owe, which often has more flexible terms and no obligation to make surplus income payments. This option can provide greater control over your finances and help you avoid the additional costs and extended timelines that come with surplus income in Bankruptcy.

Reach out to an LIT if you are feeling overwhelmed by debt and unsure of where to turn next. LITs can help you review all the debt relief options available for your specific situation so you can choose the solution that works best for you. Together, we can help you achieve a fresh financial start.