Bankruptcy and My Income

When it comes to bankruptcy in Canada, many are unfamiliar with how surplus income affects your bankruptcy process. In general, surplus income is your monthly income during the time you are bankrupt—basically, the higher your income, the more surplus income you will have to pay.

Many sole proprietor owners and self-employed individuals think that after filing bankruptcy in Canada, you are removed from making any payments to creditors. However, this is a misconception. Almost immediately after declaring bankruptcy, your surplus income will need to be calculated and discussed with your trustee based on a government formula.

Before filing for bankruptcy, you need to consider many things. First, let’s outline the misconceptions of declaring bankruptcy and outline the advantages if you decide to file for it.

Common Misconceptions about Bankruptcy

Your debts are piling up, and you can barely make the minimum payments. You think by filing for bankruptcy, you’ll be off the hook, right? Not necessarily.

Here are the common misconceptions debunked when you go bankrupt:

Once I file for bankruptcy, can I avoid legal action?

Yes, you can avoid legal action taken by your unsecured creditors. Once you declare bankruptcy, bankruptcy law covers you under something called an ‘automatic stay.’ The automatic stay means that creditors are no longer able to collect unpaid debts prior to you filing for bankruptcy. However, you must agree with your trustee to make surplus income payments because if you fail to do so, you remain bankrupt.

Is it cost-effective to file for bankruptcy?

Depending on how much your debts are, declaring bankruptcy might be a cheaper option because you will no longer have to pay creditors high-interest rates. Your surplus income will have a positive effect on debt recovery.

When I declare bankruptcy, will I no longer have to pay my other debts?

No. That’s not the case at all. Debts you will still owe during bankruptcy are: spousal and child support, fines that are mandated by the court, and student loans. Student loans are exempt when the individual has been out of school for more than seven years.

Now that you know which misconceptions of bankruptcy are debunked, here are five reasons why surplus income is important for debt recovery:

Surplus Income affects Length of Bankruptcy

Your surplus income is based on your monthly net income and your number of dependents; a government formula is used to see if you come under this rule.

How long will you be bankrupt?

It depends. If your net income does not meet the government limits and this is your first bankruptcy, you won’t have to make surplus income payments. If this is your case, you can expect to be discharged from bankruptcy in 9 months.

For those who are on the first bankruptcy and need to pay surplus income, you can expect the bankruptcy to last 21 months. If this is your second or third bankruptcy, you need to pay surplus income for 36 months.

Surplus Income Payments are Legally Binding

Not only does surplus income payments affect the duration of your bankruptcy, but you are legally bound to pay them according to the Bankruptcy and Insolvency Act (BIA). If you miss your payments or fail to report your monthly income, you prolong your bankruptcy process, and your debts will not be discharged.

The More You Earn, the More You Pay

During your bankruptcy process, your income might fluctuate. It’s important to understand that during this period, all sources of non-taxable and taxable income are included in your surplus income payments. Your net income is always included, along with pensions, child tax credits, and spousal and child support. If you start receiving other monies, it will increase your monthly surplus income. If your income goes down, your required payment will go down.

Go to Meditation if You Can’t make Surplus Income Payments

If you started making your surplus income payments to your trustee, but cannot make them during the middle of your bankruptcy process, you can request for surplus income mediation. During the mediation, an extension of time to make the required surplus income payments will be decided between you and the trustee.

Opting to mediation is better than avoiding payments altogether, as not making the payments results in staying bankrupt.

Regular Income Reporting is Mandatory

Along with making your surplus income payments regularly, it’s mandatory to report your monthly income or any changes to your financial situation to your trustee. Also,if you change your phone number, move houses, leave the country, take on a new job or lose a job, you must report this information to your trustee.

Good communication with your trustee and making your surplus income payments will help the bankruptcy process proceed smoothly.

As you can see, filing for bankruptcy doesn’t let you off the hook completely. You must take into account that you may have surplus income payments.

If you are a small business owner in Toronto, the GTA, or Southern Ontario looking to file bankruptcy, these payments determine how long you will be bankrupt. But don’t worry, we’re here to help.

To learn more about why surplus income payments are important for debt recovery, call Kevin Thatcher & Associates at 1-866-702-9801 or contact us here.