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Surplus Income and Bankruptcy: The Basics

Surplus Income: Oxymoron?

Let me start by saying that I think this term “surplus income” is stupid. I didn’t make it up; our government did. I have to explain this process to everyone who comes in to my office. Most will tell me that if they had surplus income, they wouldn’t be here. If there ever was an oxymoron, this is it.

Enough ranting. Surplus income rules apply to anyone who is considering filing for bankruptcy. Basically, if you file for bankruptcy, you are allowed to earn a living. Our government determines the amount of that living. If you stay below that amount, there is nothing you have to pay your creditors during your bankruptcy. If you go over that amount, you must pay some of it to your creditors. And if you go over it by a lot, our friends at the government extend the basic 9 month bankruptcy period to 21 months. This is the simple version; if you really want the technical explanation of how surplus income works, you can read more on our Hoyes website. All you really have to know for now is “the more you make, the more you pay”.

So you might be wondering, isn’t this punitive? If you can’t afford to pay your debts and want to file for bankruptcy, how can you afford to make, in some cases, these hefty surplus income payments? I call this the “surplus income trap”; you are trying to get out from under your debts but you land in this sink hole that says you have to pay surplus income for 21 months, and it may be more than you can afford.

I trash talked the government earlier, so let me say something good about them. When they made these surplus income rules that seem to penalize people who make a decent wage but want to file for bankruptcy to get rid of their debts, they gave these people an out. And that out is called a consumer proposal. Basically, a consumer proposal allows you to pay less to your creditors on a monthly basis, but allows you to offer them more in total because the consumer proposal can run over 5 years. As an example, let’s say the surplus income rules require you to pay $500 per month over a 21 month period for a total of $10,500. You can’t afford $500 per month, but let’s say you can afford $250. In a consumer proposal, you would offer your creditors $250 per month for 60 months for a total of $15,000. Your creditors come out ahead because they get more money. And you come out ahead because: 1. you can afford $250 per month; 2. you have avoided filing for bankruptcy; and 3. you have stayed away from the surplus income trap. Your classic “win win” situation. (This was just an example. Everyone’s fact situation is different and these numbers may not apply to your case.) You can read more about the surplus income penalty at our consumer proposal information site.

If you’ve read this far and are interested in finding out whether or not you can avoid paying surplus income by filing a consumer proposal, contact us to schedule a consultation. And even if you think you want to file a bankruptcy because surplus income won’t affect you, call us as well. There is no charge for meeting with us. We will try and come up with a plan that works for you and your family.

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