The Bankruptcy laws in Canada are meant to create a balance between allowing the honest unfortunate debtor a fresh start, while allowing creditors to recover some of the funds that they are owed. One of the ways this is done is through the requirement to make payments if you have “surplus” income.
Many individuals are surprised to find out that they are considered to have a surplus income obligation to make payments in their bankruptcy. The common misconception is that if you have no money left over at the end of month you have no surplus income. This is not the case.
The surplus income calculation is based on a guideline set by the government according to your family size. If your household earns above this guideline then you have surplus income. There are some expenses that are taken into consideration when calculating your surplus income obligation- including support payments, medical expenses and day care costs. However, the calculation is not based on your budget, or on your expenses. Instead, it is based on your household income in comparison to the government mandated guidelines.
Calculating surplus income can be confusing for many individuals. As your advisor, your Trustee is able to explain the calculation to you, and will also provide you with updates on your surplus income obligation throughout the bankruptcy process. If your surplus income obligation is significant, it is always advisable to consider filing a consumer proposal.
Filing a consumer proposal is a good choice for those individuals that can afford to contribute something to their creditors, but can’t afford the total debt load, and the accruing interest charges. If you would have a surplus income payment in the bankruptcy option, then by filing a proposal, you can have more flexibility in terms of the monthly payment. In a consumer proposal, the payment is often geared to your budget rather than set according to a fixed government guideline. This can often mean that the monthly payment is more affordable than the bankruptcy option, though the length of time that you are required to pay may be longer.
The surplus income requirements are meant to create a balance between the honest debtor that cannot afford to maintain their credit obligations and the creditors that will not get paid in a bankruptcy. Usually when you consider the amount of debt that you would be released from paying in a bankruptcy, the surplus income obligation is reasonable.