The concept behind surplus income in a bankruptcy in Canada is simple: the more you make, the more you pay. Under federal bankruptcy rules, you are permitted to earn a set amount each month; if you earn more than that amount, you pay more. Here’s a simple example:
In 2011 a single person is allowed to earn $1,926 per month, net income, after taxes. Each month you send copies of your paystubs to your trustee, and if you earn more than that amount, you pay a surplus income penalty of half of the amount you are over the limit. So, if you earned $2,526 this month, you are $600 over the limit, so you are required to pay a penalty of half of that surplus, or $300.
At the end of the first seven months of your first bankruptcy the trustee averages your income, and if on average your income was more than $200 over the limit, your bankruptcy is automatically extended from nine months to 21 months, and you are required to make that surplus income payment ($300 in this example) for the full 21 months.. Obviously surplus income greatly increases the cost and length of your bankruptcy.
So, what’s the solution?
First, before you go bankrupt, do the math. When you meet with me, or any of my associates in our Brantford bankruptcy office, we’ll help you crunch the numbers. We’ll estimate what your surplus income is likely to be, and then you can decide whether or not bankruptcy is the correct option for you. In fact, we’ve developed a special computer program to help with the math. We take into consideration when you get an extra paycheque (a three pay month if you get paid bi-weekly, for example), to help estimate your expected surplus.
Second, we can show you how to avoid the surplus income penalty by filing a consumer proposal. How does that work? If you know that your bankruptcy is likely to be extended, it may make more sense to avoid bankruptcy and file a consumer proposal instead.
With a consumer proposal we can extend your payments over a longer period of time, which keeps the monthly cost lower.
Which option is right for you? We’ll crunch the numbers, so that you can make an informed decision that makes sense in your situation. You can read more about how surplus income payments are calculated, or watch this video where we answer a real life question about surplus income.
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