Perhaps you have already met with a Licensed Insolvency Trustee (LIT) or heard a buddy talking about Surplus Income and Bankruptcy but are still not quite sure what it is, how to calculate it and why someone in bankruptcy may be required to make payments based on it. In this blog, I will explain the what, how and why of Surplus Income payments in a bankruptcy.
So, What is Surplus Income Anyway?
The short answer – surplus income is income that is earned above a certain standard.
This standard, called the Superintendent’s Standards, is updated each year based on information released by Statistics Canada and works in conjunction with the Directive on Surplus Income and section 68 of the Bankruptcy and Insolvency Act.
LITs will use the Superintendent’s Standard to determine the portion of the bankrupt’s income that ought to be paid into their bankruptcy for the benefit of their unsecured creditors.
How is Surplus Income calculated?
Surplus income obligations can be a straightforward calculation or a bit convoluted, depending on your situation. If you click here, you will see a copy of the Superintendent’s Standards.
When calculating surplus income, you need to know what the different variables are that impact the calculation. These variables include family size, other members who have income, other members with income that refuse to report their income, and whether there are non-discretionary expenses.
Total income is defined under section 68.(2) of the Bankruptcy and Insolvency Act to include revenue of whatever nature or from whatever source that is earned or received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge… It is intended to be a very broad term to include everything from a GST credit to damages for wrongful dismissal.
The standard or amount that a family can earn depends on the number of people living in the home. As per the 2018 Superintendent’s Standards, the standard for a single person is $2,152 and for seven-plus people, it is $5,694. If the total household income is below the standard, you have no surplus income obligations.
Other Income and Those You Choose Not To Report
When calculating surplus income obligations, your LIT is required to know the income of all the family members in the family unit.
If your non-bankrupt spouse refuses to report income, then the standard for the family is divided into two. For example, a family of four can earn $3,998 per month. If your spouse refuses to disclose their income, the Standard then becomes $1,999 ($3,998/2).
If your child or relative refuses to report income, then, for the purposes of this calculation, you reduce your family size by one person. For example, a family of four becomes a family of three where someone other than your spouse refuses to report income.
Non-discretionary expenses are expenses that you are required to pay. As per paragraph 5 (3) of the Directive, these 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 that are a condition of employment;
- any other debt where a stay of proceedings has been lifted by the Court, and a recourse authorized; and
- interest paid on debts that are not dischargeable in bankruptcy (student loans)
Since these payments are required to be made, they serve to reduce the household income.
Let’s say that John is a single guy that pays child support. His income, after statutory deductions, is $3,600 per month. His child support is $400 per month and based on the Superintendent’s Standards (2018) for a family of one, he can earn $2,152 before having surplus income. His surplus income would be $1,048 ($3,600 – $400 – $2,152). If John files a bankruptcy, he will be obligated to 50% of his surplus until he is discharged. His monthly payment would be $524 per month.
Let’s say that Lori is married and they have 3 kids. Her spouse does not want to disclose income and her 24-year-old son who works full-time also does not want to disclose his income. As Lori’s son does not wish to disclose his income, the family size would be considered to be a family of four. A family of four under the Superintendent’s Standards (2018) is allowed $3,998. Since her spouse has refused to report income, we then split the standard of $3,998 by half. Lori is allowed to earn $1,999 before having a surplus income obligation.
Why is a Person in Bankruptcy Required to Pay Surplus?
A lot of people are surprised that they may have payments under this concept and feel like it is “kicking me while I’m already down”. Requirements arising from surplus income was legislated with the aim that bankrupts with the financial means to contribute should do so in order to maximize the recovery to their creditors.