Navigating Bankruptcy and Consumer Proposals: The Crucial Role of Surplus Income 

^{By Vanessa Zral, Bromwich+Smith Staff | 669 words | Reading Time: 3 minutes, 20 seconds | Date: 2023/12/21}

Surplus income is a common term when it comes to filing for insolvency, but it can be difficult to fully understand. Surplus income refers to the amount of money your household makes that is more than the government's guideline. Understanding the concept of surplus income is crucial when facing bankruptcy or considering a consumer proposal.  

Surplus income describes the amount of money designed to cover basic living expenses. This surplus is calculated based on your income and family size.. Simply, it represents the discretionary income available after meeting essential needs. 

The Office of the Superintendent of Bankruptcy, who oversees all the insolvencies and Licensed Insolvency Trustees in Canada, sets out a guideline for the amount of money a household is allowed to earn in a month to pay for basic living expenses, depending on how many people are in the household. This guideline is based on the Low Income Cutoffs from Statistics Canada, and is the same for families all across Canada. 

The Importance of Understanding Surplus Income: 

In a bankruptcy, the amount of money that you'll pay and the length of time you'll be in bankruptcy is based on the number of times you've been bankrupt before as well as the amount of money that you earn. So what does that mean for you? If your household is bringing in more money than the guideline, you are in a surplus position, and the bankruptcy will be 21 or 36 months in length (depending on how many times you've been bankrupt before). Additionally, any amount of money that is earned by the household above and beyond the guideline set out, is called surplus income and about 50% of that money will need to be paid into the bankruptcy estate.  

Impact on Bankruptcy Duration: 

Surplus income directly influences the duration of bankruptcy. If you have surplus income, your bankruptcy period will be extended and you will be required to pay more. , meaning you'll be under the financial restrictions for a longer duration. Understanding how surplus income is calculated and its implications can help you make informed decisions. 

Impact On A Consumer Proposal:

In a Consumer Proposal, a Licensed Insolvency Trustee works with creditors to reduce the total amount of debt that is repaid. If you're filing a proposal it's important to understand surplus income as it has an impact on that total amount of repayment.  While surplus income could cause the proposal to include a higher repayment to the creditors, it usually results in a smaller monthly payment than you would need to make in a bankruptcy because the proposal can last up to 5 years.  

Budgeting and Financial Planning: 

Recognizing surplus income allows you to budget more effectively during bankruptcy or a consumer proposal. By managing your discretionary income wisely, you can ensure that you meet your financial obligations and demonstrate a commitment to resolving your financial challenges. 

Is Surplus Income a Good Thing or a Bad Thing?  

The perception of surplus income largely depends on individual circumstances and perspectives. Here are some considerations: 

The Positive Side: 

Having a surplus income is a good sign, it shows that you are earning a living wage and have steady employment! 

• Structured Repayment: Surplus income can be viewed positively as it demonstrates a commitment to structured repayment of debts. It reflects a willingness to contribute a portion of income toward settling financial obligations. 

The Challenges: 

• Extended Financial Restrictions:  
  Having a surplus income may result in a longer duration of bankruptcy.  

Navigating the Path Ahead: 

Surplus income is a critical factor that can shape the terms and duration of your financial restructuring and understanding it is key to making informed decisions during bankruptcy or a consumer proposal. Seek professional advice to navigate your specific situation, weighing the pros and cons of all the options available to you.  

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