If you’re considering filing for bankruptcy, your income determines how much you will pay. If you have surplus income, the cost of bankruptcy is higher.
What is surplus income?
Surplus income is the amount a family makes above the levels set by the government during bankruptcy.
Every year, the government sets income thresholds through the Office of the Superintendent of Bankruptcy, which allows you and your family to maintain a reasonable standard of living during your bankruptcy.
When you make more money than the threshold, you must make surplus income payments to your Licensed Insolvency Trustee, who distributes these funds to your creditors during bankruptcy.
The more you earn, the more you pay toward your bankruptcy.
Surplus income will affect the cost of your bankruptcy, and it will take longer to complete. You won’t be discharged from bankruptcy until you make all the monthly payments.
If your income increases during bankruptcy, you pay more into your bankruptcy estate. Likewise, if your income decreases, you’ll pay less.
Surplus income limits for 2022-2023 in Canada
The bankruptcy surplus income limits are shown below:
|Family Size||Income threshold|
Source: The OSB: Directive No. 11R2-2022R: Surplus Income
How to calculate surplus income
Surplus income is defined by the Canadian government’s Bankruptcy and Insolvency Act and differs for each person, depending on their circumstances.
The criteria for surplus income are as follows:
- Your net monthly household income after tax and deductions.
- The number of dependents in your household.
- Any non-discretionary expenses.
- Your share of the household income.
To calculate surplus income, take your household’s available monthly income after tax, deductions and expenses and subtract the income threshold amount. You pay half of this surplus amount each month into your bankruptcy estate.
Examples of non-discretionary expenses include:
- Child support payments.
- Spousal support payments.
- Child care expenses.
- Expenses associated with a medical condition.
- Court-imposed fines or penalties that are in the process of being paid.
- Expenses permitted by the Income Tax Act or similar provincial legislation.
- Any other debt where the court has lifted a stay of proceedings.
- Interest paid on debts that are not dischargeable in bankruptcy.
Surplus income is pro-rated based on the monthly household income contribution. So if you are filing for bankruptcy and earn 60% of the income for your household, the monthly surplus income is reduced to this percentage.
Surplus income can vary depending on how many hours you work and whether you are off sick (earning less).
Each month, you must send proof of your income and receipts for some expenses so your bankruptcy trustee can calculate how much you need to pay.
Canada Childcare Benefit (CCB), Canada Recovery Benefit (CRB) and Canada Emergency Response Benefit (CERB) are not included as income.
Example surplus income calculation for a family unit of two
The following example for a family unit of two:
|Bankrupt’s available monthly income:||$2,800|
|Other family unit member’s available monthly income:||$1,000|
|Family unit’s available monthly income:||$3,800|
|The threshold for a family unit of two:||$2,931|
|Total monthly surplus income:||$869|
|Family Situation Adjustment:
(2800 ÷ 3,800 = 73.68%
$869 × 73.68% = $640.28)
|Payment required from bankrupt:
($640.28 × 50% = $320.14)
How this works:
- You earn $2,800 per month after tax, deductions and non-discretionary expenses.
- A family member earns $1,000 monthly after tax, deductions and non-discretionary expenses.
- In total, the family unit’s available income is $3,800.
- There are two people in your family, so the government income threshold is $2,931.
- This means that your total monthly surplus income is $3,800 – $2,931 = $869
- You contribute 73.68% of the family unit’s available monthly income, so we use this percentage to determine your share of the monthly surplus income.
- Your share of the monthly surplus income is $640.28
- You are required to pay 50% of that amount, which is $320.14 per month.
How long will I have to make surplus payments?
Surplus income automatically extends your bankruptcy, and it takes longer to be discharged.
If this is your first bankruptcy and your surplus income is less than $200 per month, you are eligible for an automatic discharge from bankruptcy after nine months.
If your monthly surplus income exceeds $200, a first-time bankruptcy is automatically extended to 21 months. You must make surplus income payments throughout this period.
If this is your second bankruptcy and you have surplus income, your bankruptcy will last for 36 months.
A consumer proposal might be more beneficial if you face high surplus income payments or have been bankrupt.
The premise of surplus income is that it is unjust for someone to declare bankruptcy, earn a lot of money, and then default on their debts. Therefore, the more you make, the more you pay toward bankruptcy. You will also spend a longer time bankrupt.
Consider a consumer proposal if you have a high income and need to pay surplus income in bankruptcy. Many people choose a consumer proposal as an alternative to bankruptcy because there are no surplus income payments.
To calculate surplus income or to learn how to become debt free, arrange a consultation with a Licensed Insolvency Trustee.
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