How is surplus income calculated in bankruptcy

Should your financial issues result in a declaration of bankruptcy, one of the conditions to which you’ll have to adhere is to advise your bankruptcy trustee of your household’s income each month, and then remit half of any “surplus income.”

Monthly net income thresholds for singles and families are set by the government, based on what they’ve decided it takes to maintain a reasonable standard of living. Every dollar over that is subject to a surplus income payment of 50% until your bankruptcy is discharged.

So, the basic formula then is:

Net income – government threshold = surplus x 50% = amount you must remit

You will be required to submit to your trustee proof of your income, for example your pay stubs. If you’re in a career where your income fluctuates, you may pay more some months than others.

To determine net income, taxes are subtracted, as are spousal support, child care, medical bills, and whatever other expenses you would normally deduct when preparing your income taxes.

If you are married, your spouse’s income is included in the household net income. Once net income is determined, the amount each must remit is based on each partner’s percentage of the total.

Failing to remit surplus income payments will result in the delay or denial of your discharge.

Normally, a first bankruptcy is discharged in nine months, but if your surplus income exceeds $200 each month (so that you would be paying more than $100), your discharge will be extended for 12 months, which means you will pay that surplus income charge for 21 months in total. Remember to tell your trustee if you anticipate any bonuses or overtime over the course of your bankruptcy — they will increase your average monthly pay and could extend your bankruptcy; likewise, five-paycheque months (if you’re paid weekly) or three-paycheque months (if you’re paid bi-weekly) will increase your average monthly income and could affect the length of your bankruptcy.

The amount of the government thresholds (which, for a single person is only about $2,000/month) and potential amount of remittance over a long period of time are two more reasons that bankruptcy is a last resort for most people. If you’re faced with insolvency, consider filing a consumer proposal instead. Regardless whether your income increases, your payments in a consumer proposal stay the same. Talk to your GTA Credit professional today about what is the right choice for you.

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