When I talk to people about the potential costs of personal bankruptcy in Kitchener, they often laugh when I mention surplus income. Surplus? Not me, I’ve got nothing left over at the end of the month.
That’s not exactly how it works.
Bankruptcy is a legal means for individuals to obtain a fresh financial start when their debts have become unmanageable. Balancing this out is that creditors have rights to be repaid part of the debts based on the income of the person filing for bankruptcy. In simple terms, the more someone earns, the more they would have to pay in a bankruptcy.
Bankruptcy is a legal means for individuals to obtain a fresh financial start when their debts have become unmanageable. However creditors have rights to be repaid part of the debts based on the income of the person filing for bankruptcy. In simple terms, the more someone earns, the more they would have to pay in a bankruptcy.
Here is what goes into determining the amount of surplus income to be paid when someone files bankruptcy:
- Total income received each month;
- Where income is net income or take home pay after government deductions;
- And includes income of all manner (eg. pensions, child tax benefit, support, etc.);
- Less specified non-discretionary payments including child or spousal support and medical expenses;
- If the average net income is $200 or more over the government’s limit, then a surplus income payment is required;
- The surplus income payment is 50% of the portion above the government limit;
The length of a personal bankruptcy is based on the amount of surplus income calculated over the course of the bankruptcy.
- A first time bankruptcy can be discharged (completed) after 9 months if there is no surplus income calculated.
- If surplus income is payable, then a first time bankruptcy will extend to 21 months.
- For a second time bankruptcy, the length of bankruptcy will be 24 months (no surplus) and 36 months (surplus).
The government sets the monthly surplus threshold amounts to define the base amount people can earn during a personal bankruptcy and any amount above that threshold, the government expects 50% to be paid into the bankruptcy. These thresholds are based on the family size. The threshold rates are also updated annually (based on inflation) by the Office of the Superintendent of Bankruptcy. You can find theat our main site.
Let’s discuss a couple examples (based on 2015 surplus income limits):
Case 1 – A single person making $2,600/month of take home pay on average. He pays $200 in child support. Therefore, net income for bankruptcy purposes is $2,400 ($2,600-$200). He is over the threshold limit by $338 ($2,400-$2062). He must pay surplus of $169/month for 21 months.
Case 2 – A married couple with 3 children. Their combined monthly take home income is $4,955/month which is a combination of employment income, child tax benefits and child support. They pay $300 in child care expenses. The net income for bankruptcy is $4,655 ($4,955-$300) and they are over the government limit by $310 ($4,655-$4,345) and 50% is payable into the bankruptcy for a total of $155/month.
For people who want to avoid having to pay surplus in a personal bankruptcy in Kitchener, they have another option called a consumer proposal. A consumer proposal locks in a payment plan to the creditors and does not change with income going forward. The concept of surplus income can be confusing. If you are feeling the pressure of your debts and want to explore all options call us at 519-747-0660 or send me an e-mail. As a licensed insolvency trustee, I have an obligation to review all options in detail with you so that you can make an informed decision.