What is Surplus Income?
When it comes to the bankruptcy process, there is one factor that usually confuses most people. This concept is called surplus income. Surplus income you may ask? How does a term with the word “surplus” even relate to someone who’s considering filing a Bankruptcy? If you have surplus income then you should be laughing right? Wrong.
Basically what surplus income means in a Bankruptcy is, the more you make the more you have to pay. Let me explain to you the basics of surplus income.
The government sets thresholds or guidelines on your net earnings (after taxes and deductions). These guidelines are the same numbers if you live in Cambridge, Toronto, Moose Jaw, or St.John’s. For the most recent surplus income limits, see our sister site Bankruptcy-Canada.com.
If you earn more than the threshold you are required to pay half of the amount you are over . If you are over government threshold by $200 you are required to pay surplus.
If after a minimum of 6 months of monitoring a bankrupts income and expenses it is determined that the bankrupt has surplus income that is $200 or greater, then the bankruptcy is extended from 9 months to 21 months (if first bankruptcy) and surplus must be paid.
To give you an example of how surplus income can affect you, I’ll tell you about a client that I recently met with in our Cambridge Ontario office.
Michael (not his real name) is a single person with no dependents. His total debt load was $35,000.His income after deductions is $2700.00 per month.
Michaels Income- 2700
Government Threshold – 2152
Expected Surplus – 548
Expected Monthly Surplus Payment – 274
Total Expected Surplus in a Bankruptcy- $5,754 (274 x 21 months)
Michael is on shift work, so sometimes his income can fluctuate, he did not like the idea of not knowing exactly what his monthly payment would be each month in a bankruptcy. He wanted to know if there were any alternatives to bankruptcy that would help him budget his debt repayment amount better.
We talked about filing a debt proposal to his creditors through a consumer proposal. He liked this idea because unlike in a bankruptcy he did not have to report his income to the trustee each month, he did not have to worry about surplus income, he did not have to worry about not going over the threshold each month, and he always knew what his payment was going to be.
After some discussion Michael decided that a Consumer Proposal would be a better fit for him. We went ahead and filed a Consumer Proposal of $300 per month for 4 years ($14,400). Just this past week his proposal was accepted by his creditors because we were offering more in a proposal than they would have received in a Bankruptcy.
If you’re finding yourself in a similar financial situation as Michael ask a trustee how a consumer proposal can help.