What Happens to My Income if I Declare Bankruptcy?
After filing for bankruptcy, any garnishments against your salary will stop. Your wages are not affected by personal bankruptcy and you are entitled to collect your income while using the bankruptcy process to eliminate your debts. However, if your income exceeds a certain level, it is considered “surplus income” and you will be required to pay a portion of it during your bankruptcy for distribution to your creditors. It is important to understand how the surplus income rules work so you know what to expect if you declare bankruptcy.
What Is “Surplus Income”?
The Bankruptcy and Insolvency Act (BIA) sets out the rules that apply to personal bankruptcy, including the “surplus income” rules. Surplus income is the part of your income that exceeds the amount required to maintain a reasonable standard of living while bankrupt. Surplus income levels are set each year by the Office of the Superintendent of Bankruptcy (OSB), and factor in the size of your family and your household income. The larger your family, the higher the limit. If your income is more than the threshold set by the OSB, it is considered “surplus income.”
How Is My Surplus Income Calculated?
The formula for calculating surplus income is complicated. The good news is that your Licensed Insolvency Trustee (LIT) will take care of the surplus income calculations for you during the bankruptcy process. You provide pay stubs and other proof of income, and your LIT will determine if you have surplus income based on the available limit for a family of your size. Generally, the greater your household income, the more you will be required to pay. However, you do not have to pay all income earned over the OSB’s threshold:
- If your surplus income is less than $200 per month, you are not required to pay any of that amount.
- If your surplus income is more than $200 per month, you must pay 50% of the amount over the threshold to your LIT to be distributed among your creditors.
To get an idea of how it works, see here for the 2021 surplus income standards and some sample calculations.
What Counts as Income?
Surplus income is based on your net income—in other words, what you take home after taxes and deductions for CPP, EI, etc. It is important to understand, however, that it is not just the bottom line on your paycheque that counts. Other types of income must be included in determining whether you have surplus income. Here are some of the basic rules:
- Retirement income from sources such as CPP, OAS, or any other type of pension must be included.
- Income you receive from retirement assets like RRSPs, LIRAs, and RRPs must be included.
- Amounts you receive for child support, spousal support, child tax credits, and universal child tax credits are counted as income.
- You are not permitted to deduct “discretionary” RRSP contributions or Canada Savings Bond purchases to reduce your income level.
- You can deduct “non-discretionary” amounts you have to pay, such as child support payments, spousal support payments, child care expenses, and certain medical expenses.
There are also special rules for dealing with income fluctuations (for example, if your income drops or increases during the bankruptcy period) and for averaging irregular income (e.g. bonuses, commission income). Talk to a bankruptcy trustee for more details on what counts toward income and what is deductible.
What Else You Need to Know About Surplus Income
The timing of your discharge from bankruptcy depends on, among other factors, whether you are required to make surplus income payments. If your average surplus income is less than $200 per month, you are eligible for an automatic discharge 9 months after filing for bankruptcy (assuming it is a first-time bankruptcy). If your average surplus income is more than $200 per month (on average for the first seven months), your bankruptcy is extended to 21 months. If you are thinking about filing for bankruptcy, it is a great idea to talk to a Licensed Insolvency Trustee about potential surplus income payments based on your salary and other sources of income. Depending on your expected income level, it may be more advantageous for you to file a consumer proposal instead of filing for bankruptcy.
Do You Have Questions About Filing for Bankruptcy?
If you are struggling with debt and considering filing for bankruptcy, Crowe MacKay & Company’s trusted advisors are here to help. Our Licensed Insolvency Trustees can evaluate your current financial situation, suggest solutions to deal with your debt, and guide you through the process of selecting the option that is right for you. In-person or virtual appointments are available with our Vancouver and Surrey offices. Get started by contacting us today to schedule your free initial consultation with one of our trusted Licensed Insolvency Trustees.