In a bankruptcy the amount of money you are required to pay is based on your income. Each month you are required to provide your trustee with copies of your pay stubs and proof of any other income. If you earn money above a certain threshold, you will be required to pay more into your bankruptcy. This is a government rule and it is called surplus income. In many regards it is a penalty because the more you make, the more you are required to pay. If you have high income, this can mean your monthly bankruptcy payments could be high as well. To add to the confusion, your trustee won’t make this calculation until you have been bankrupt for seven months. So how can you avoid this surplus income penalty? The answer is to file a consumer proposal.
What are the surplus income limits?
If you earn more than the government allowed limit, you are required to pay half of the amount you are over the limit. The surplus income during bankruptcy in Canada limits for 2019 are as follows:
|Family Size||Income Limit|
So, if you are a family of three (you and your spouse and one child) and you earn $4,372 after tax in a month (and your spouse is not working), you are $1,000 over the limit, so you are required to make a surplus income payment of half of that amount, or $500.
At the end of the first six or seven months of your bankruptcy your trustee will average your income, so if you have one high income month followed by a low income month, you are not penalized for one or two high months. However, if your average income is more than $200 over the limit each month, your bankruptcy will be extended for an additional year.
In our example, if you were $1,000 over the limit for the first seven months of the bankruptcy, (and assuming it’s your first bankruptcy), you would be required to make surplus income payments of $500 per month for 21 months! That’s $10,500.
This can raise several concerns about bankruptcy being the right solution:
- The added duty to report income monthly to the trustee.
- Not being able to afford the required monthly surplus income payments.
- It can get expensive if you expect your income to increase, or if you are expecting a bonus, or overtime.
- Uncertainty as to what payments amounts will be if your income changes.
- Not knowing how long you will be bankrupt or how much you will have to pay in order to get discharged, until after the trustee makes the surplus income calculations.
How to Avoid Surplus Income
File a consumer proposal.
For you to file a consumer proposal, your creditors must get more than they would recover in a bankruptcy. Your trustee will estimate your surplus income payments and any other realizations from all assets available to your creditors in a bankruptcy. Even though you need to offer more money to your creditors than you would in a bankruptcy, your payments can be spread over a period of up to five years.
What a consumer proposal solution does is decrease your monthly payments to an amount that is more affordable and within your budget.
Once the creditors agree to the payment terms, that’s it. Even if your income increases, your payments in the consumer proposal are fixed.
Overtime may be mandatory where you work, but you know that in a bankruptcy you are paying half of your overtime to the trustee, so you don’t want to work overtime. A proposal solves that problem, since your payments don’t increase if your income increases.
In the example above, instead of filing bankruptcy and potentially paying $500 per month for 21 months or $10,500, you might consider offering a consumer proposal where you pay $200 per month for 60 months, or $12,000.
Why would you offer $12,000 when a bankruptcy may only cost you $10,500? Two reasons:
First, if your income increases in a bankruptcy, or if you get a tax refund, or have other assets, your bankruptcy could easily cost more than $10,500.
Second, payments of $500 per month might be a strain on your monthly budget, while $200 per month is easily affordable. So, for you, paying $200 per month for a longer period may be preferable to paying $500 per month for a shorter period.
Also, you can pay off a consumer proposal anytime, so if you do work overtime you can pay extra in your proposal, and pay it off quicker. It’s possible that you could have your proposal paid off even sooner than the bankruptcy would last, so you get the best of both worlds.
The cure for high surplus income payments in a bankruptcy in Canada? File a consumer proposal.
An initial consultation can help flush out the likelihood of whether or not you would have to pay surplus income and whether a consumer proposal might be an effective option for you. Book a free consultation with a licensed insolvency trustee near you.