What you need to know about surplus income

If you decide to file for Bankruptcy to get a fresh financial start and deal with your unsecured creditors, one of the first things you’ll do is have a discussion with a Licensed Insolvency Trustee (LIT) about surplus income. But what is surplus income and how does it impact your Bankruptcy filing? 

According to the Bankruptcy and Insolvency Act, surplus income is the portion of a Bankrupt individual’s total income that exceeds that which is necessary to enable the Bankrupt individual to maintain a reasonable standard of living, as per the applicable standards established.

In short, surplus income is the income you earn that exceeds a pre-determined threshold. In certain cases, your surplus income results in an obligation to make surplus income payments.

Let's take a deeper look at what this means.

Understanding surplus income in Bankruptcy

When you file for Bankruptcy, you’ll work with an LIT to calculate your household income. For employees, they’ll look at your income after tax deductions, pension deductions, employment insurance deductions, and any other mandatory deductions. If you’re self-employed, income would be calculated as gross business income less business deductions and an estimated tax deduction.

Certain expenses can lower your total income for surplus income calculations. These include childcare costs, select medical expenses, select employment expenses, and legally mandated child support payments.

How are surplus income and payments calculated?

Understanding surplus income can be complex, so speaking with an LIT can help you develop a clear picture. Here’s the basic idea: we start with your family income and then compare it to the yearly guideline set by the Office of the Superintendent of Bankruptcy. This guideline varies depending on the size of the household.

If your family income exceeds the guideline by $200 or more, you’ll be required to pay surplus income to the LIT for the benefit of your creditors. The payment is 50 cents for every dollar over the guideline. This amount is adjusted based on your share of the family income.

If this is your first time filing for Bankruptcy and you have surplus income, you’ll be in Bankruptcy for 21 months and you’ll make surplus income payments during this time. Surplus income amounts can change if family income changes during the Bankruptcy period. 

If this is your first time filing for Bankruptcy and you don’t have surplus income, you’ll be in Bankruptcy for nine months and will only need to pay a voluntary basic fee.

Adjusting your surplus income

As stated previously, at the onset of the Bankruptcy filing, an LIT will verify your household income and determine if and what surplus income obligations you may have.

During the Bankruptcy period, you will need to send monthly income and expense reports to the LIT. This helps keep the surplus income calculation accurate and ensures compliance. The LIT will average your income (after deducting necessary expenses) over the first nine months and calculate the surplus income amount you need to pay. A rule of thumb for surplus income would be that increases in your family income will result in increases in your surplus income payments and vice versa.

If you can’t make all your required surplus income payments on time or you don’t agree on the payment amount, it can be resolved through mediation. In mediation, you, the LIT, and a member of the Office of the Superintendent of Bankruptcy can negotiate a payment plan to catch up on your payments. 

You can’t be discharged from Bankruptcy until all your surplus income obligations have been met.

We can help

If you are overwhelmed with debt and living expenses, please consider booking a free, no-obligation appointment with one of our experienced LITs. They can help review your situation and discuss all the options available to help you on your debt-free journey, including Bankruptcy or Consumer Proposal.

Reach out to us today for a free confidential consultation to discuss your debt management needs.