This is one of the most popular questions about bankruptcy we are always asked. The concept of surplus income in bankruptcy doesn’t seem to make much sense. After all, if you are bankrupt, how can you have surplus income? So let’s start at the beginning and clear up all the confusion. That way we can explain the answer to the question “What is surplus income in bankruptcy?”.
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The answer
Heading into bankruptcy, your licensed insolvency trustee (LIT) must make an assessment. The more you earn, the more you must contribute. A definition is:
The amount of a debtor’s total income that exceeds what is necessary to maintain a reasonable standard of living. A reasonable standard of living is according to the standards set by the Office of the Superintendent of Bankruptcy. This is also sometimes called the OSB surplus.
The actual Superintendent’s standards are right at the poverty line so don’t get happy when you see words like “reasonable standard of living”. The bankrupt must make payments out of this surplus income to the LIT for distribution among the creditors.
The Office of the Superintendent of Bankruptcy sets limits for what a family can earn. The larger your family, the more you can keep. The thresholds increase each year. The government has established a list of earnings levels for households of different sizes.
If the household’s revenue exceeds the level set by the government then you have surplus income. Payments are made to your LIT. The government’s instructions about surplus income are in the Superintendent’s Directive 11R2.
What can I deduct for surplus income in bankruptcy?
There are some allowable deductions this calculation in bankruptcy:
- 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) that are a condition of employment
- any other debt where a stay of proceedings has been lifted by the Court and a recourse authorized
- interest paid on debts that are not dischargeable in bankruptcy under paragraph 178(1)(g) of the Act
If my salary changes, does my calculation change?
During your bankruptcy, you will have to report your monthly income and expenses to your LIT. The LIT must perform the surplus income calculation every time your income changes while you are in bankruptcy. You must make up any extra amount required if your income rises while you are in bankruptcy.
In a debt settlement restructuring, the amount you and your creditors have agreed upon is the same amount you pay. There is no monthly reporting of your income to your LIT and no recalibration to an increased amount if your income rises. Therefore, in a consumer proposal, surplus income in bankruptcy must be considered. This is to make sure that your consumer proposal is a better alternative than bankruptcy.
What now if I have too much debt?
If you’re considering bankruptcy you need the services of a LIT. Contact Ira Smith Trustee & Receiver Inc. We provide the depth of expertise found in a large company, delivered in an informal setting. We ensure you will receive a high quality and cost-effective service.
With a joint 50+ years of experience dealing with diverse issues and complex files, the Ira Smith team delivers the highest quality of professional service. Take the first step to Starting Over, Starting Now.
THIS VLOG WAS INSPIRED IN PART BY OUR eBOOK – PERSONAL BANKRUPTCY CANADA: Not because you are a dummy, because you need to get your life back on track
