Understanding the rules of surplus income

Whether you undergo a bankruptcy proceeding or a consumer proposal to get a fresh start from excessive debt, one important item to understand is the rules around surplus income.

What is surplus income?

Surplus income is typically a monthly contribution you pay your Licensed Insolvency Trustee (LIT), for the benefit of your creditors, once you surpass a pre-determined threshold of income as determined by the federal government. Many people never reach that threshold, but some circumstances — such as a pay raise or worked overtime — can lead you to pay a portion of the increase as surplus income.

For bankrupt individuals, the threshold is determined by an annual directive from the The Office of the Superintendent of Bankruptcy (OSB). The higher above the threshold you are, the more you can expect to pay each month in surplus income.

If there are surplus income payments going into your estate, the LIT will distribute the funds to your creditors on a priority basis. This is not a means of paying down debt faster or expediting the duration of your proposal or bankruptcy; it’s only designed to help offset your creditors’ losses.

How is it calculated?

The annual OSB guidance includes a table of surplus income thresholds that LITs use to determine whether payments will apply in your situation.

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 50 percent of the overage, adjusted to the proportion of your family’s income you earn.

Broadly speaking, the factors which determine where you sit on this table include your monthly earnings, the size of your family and their earnings, as well as your statutory remittances and non-discretionary expenses each month.

For a detailed set of examples of surplus income calculations, click here. For a template that allows you to calculate your surplus income, click here.

How do the rules differ in a bankruptcy and a consumer proposal?

Both proposals and bankruptcies have provisions for collecting surplus income.

In bankruptcies, 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.

You will need to pay an average amount of the surplus income you earned over the course of your nine-month bankruptcy period.

In consumer proposals, the amount you need to pay in surplus income will only be calculated at the beginning of the proposal and will remain fixed throughout the duration of it. If your income goes up or down during the proposal, the allocation does not change. 

The same principle is true if your assets change in value. For example, if the value of your home goes up in a bankruptcy, that may change the amount available to creditors. But in a proposal, your payments are only based on a “snapshot” of your assets’ values at the beginning of the proposal, and those amounts remain fixed.

How do I stay within the rules of surplus income?

The key to staying compliant is to be transparent and report changes in your income to your LIT. They are there to ensure the creditors get as much remediation as possible but also protect the interests and the rights of the debtor to the greatest degree possible.

If during a bankruptcy your income goes up, or your earning potential goes up, you and your LIT can do some math together and figure out if there’s a need to make surplus income payments, and if so, how much they amount to.

If you’re going through bankruptcy as a business owner, freelancer, gig worker, or someone who is otherwise able to have substantial control over your income, be transparent about any fluctuations in your monthly income. Large month-by-month variations can look suspicious.

If you ever have a difference of opinion with your creditors or your LIT on how the rules of surplus income should apply to your situation, you have the option to resolve it through a mediation process.

How MNP can help

If you feel your debt has become too burdensome to manage alone, our LITs are only a call away. We’ll walk you through your options and ensure you’re informed on what’s best for yourself and your family, whether it’s a Consumer Proposal, Bankruptcy, or alternative method. The initial consultation is free and carries no obligation.