How surplus income payments can affect your Bankruptcy

If you’re overburdened by debt, Bankruptcy can be a practical and cost-effective solution to achieve a financial fresh start. But it will not always free you from repaying a portion of your outstanding debts.

Most people recognize they may have to give up certain assets in a Bankruptcy. Fewer realize they may also have to contribute a portion of their monthly income. Depending on your income and family situation, surplus income payments can increase the cost of a Bankruptcy and reduce some of its benefits in eliminating your debt.

The following overview will help you understand surplus income payments and how they may apply in your situation. It will also help you initiate a Free Confidential Consultation with greater confidence about what a Bankruptcy could entail — and whether it would be the preferred option to address your debt. 

What are surplus income payments and what purpose do they serve?

Broadly speaking, Bankruptcy legislation balances four key goals:

1. Helping you gain a financial fresh start and freedom from unmanageable debts
2. Helping your creditors recover as much of your outstanding debts as possible
3. Ensuring you maintain a reasonable standard of living throughout your Bankruptcy
4. Ensuring you will be able to rebuild your life after your Bankruptcy

Depending on your financial and family situation, part of this process may include a requirement to make surplus income payments. These monthly contributions go directly into your Bankruptcy estate, and the Licensed Insolvency Trustee (LIT) will distribute the funds to your creditors on a priority basis.

The Office of the Superintendent of Bankruptcy (OSB) provides an annual directive to LITs which guides them in determining whether you meet or exceed a basic standard of living as a bankrupt individual. The higher you are above this minimum standard of living, the more you can expect to contribute in surplus income payments.

How are surplus income payments calculated?

The annual OSB guidance includes a table of surplus income thresholds that LITs use to determine whether payments will apply in your situation. Factors which determine where you sit on this table include:

1. Your monthly income over the course of your Bankruptcy — This considers everything including employment or self-employment wages; government benefits or subsidies; pensions; and spousal support.
2. The size of your family — Because expenses typically increase proportionate to the number of people in a household, surplus income thresholds are lowest for individuals and get progressively greater for households up to seven or more people.
3. Your family’s income over the course of your Bankruptcy — Even you are the sole Bankruptcy applicant, the OSB still requires LITs to consider the impacts other income earners in your family have on your standard of living and ability to repay your creditors.
4. Your family’s statutory remittances and non-discretionary expenses — LITs will subtract certain unavoidable costs, which will reduce the amount counting against your surplus income threshold. Some common examples include:
   
   1. Income tax and mandatory payroll deductions if self employed
   2. Certain medical costs
   3. Interest on debts that are ineligible to include in a Bankruptcy
   4. Child / spousal support payments
   5. Childcare expenses
   6. Court fines / penalties
   7. Etc.

You will make surplus income payments if your household’s available income exceeds the surplus income threshold for your family size by $200 or more. Your payment will be equivalent to fifty percent of the overage, adjusted to the proportion of your family’s income you earn.

To understand how this could apply in your situation, consider the following examples:

Family of four

Family of two

Single person household 

As you can see in the final example above, the bankrupt individual had surplus income — but less than $200 above the surplus income threshold. This person would therefore not be responsible to make surplus income payments during their Bankruptcy.

How will a change in income affect surplus income payments?

LITs will use your monthly income and expense reports to calculate your surplus income at two points in your Bankruptcy proceeding:

At the outset of your Bankruptcy — To determine whether you will make surplus income payments throughout your Bankruptcy.

The month prior to your initially targeted discharge date ­— To determine whether any increases to your average income (e.g. raise, overtime, gainful employment, etc.) may have triggered a surplus income requirement.  

An increase in income

If the second calculation shows your average income increased $200 or more above your surplus income threshold, you will be responsible for making surplus income payments.

If you were initially eligible for an automatic discharge (e.g. first time bankrupt with no surplus income upon time of filing): You would make surplus income payments for an additional 12 months before receiving your discharge

If you were not initially eligible for an automatic discharge: You would need to pay the total value of your surplus income requirement prior to the LIT filing your application for a discharge.

A decrease in income

If your income declines throughout the course of your Bankruptcy, there would be no material change. You would not qualify to an earlier discharge from Bankruptcy and the LIT would not provide you with a refund for any amount you overpaid to your Bankruptcy estate.

When do surplus payments end?

As per Section 9 of Directive 11R2 of the Bankruptcy & Insolvency Act:

“The bankrupt's requirement to make payments under section 68 of the Act shall cease when the bankrupt is discharged, or as otherwise ordered by the Court. However, if an opposition to the automatic discharge has been filed, the bankrupt's requirement to make payments under section 68 of the Act ceases on the day on which the bankrupt would have been automatically discharged had the opposition not been filed, or as otherwise ordered by the Court.”

Life-Changing Debt Solutions

Stop struggling with unmanageable debt. Contact MNP for a Free Confidential Consultation and take the first step toward a financial fresh start today.

During this no obligation initial meeting, a Licensed Insolvency Trustee will review your entire financial situation, while seeking to understand your challenges and goals. They will identify all the potential options to address your debt and provide an unbiased opinion about which ones you should consider — and why.

If you qualify for Life-Changing Debt Solution such as a Bankruptcy or Consumer Proposal, the Licensed Insolvency Trustee will explain the potential costs and requirements of each and help you make the best, most cost-effective choice for your unique situation.

Based out of Vancouver, Grant Bazian is a Licensed Insolvency Trustee and President of MNP LTD. To learn more about how MNP Debt can help, contact our local office at 778.374.2108 or toll-free at 310.DEBT (310.3328).