Area of Law: Credit, Debt and Bankruptcy
Answer # 0272
What happens to my salary, and surplus income while I am bankrupt?Region: Ontario Answer # 0272
You are still entitled to earn an income and collect a salary when you file for bankruptcy under the Bankruptcy & Insolvency Act (BIA). However, depending on your income level, and family situation, you may be required to contribute a portion of your income to your bankruptcy estate, to be made available to your creditors. These are called surplus income payments. The more you earn, the more you will be required to repay.
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Government pensions and retirement income
If you receive Government retirement income, such as the Canada Pension Plan (CPP) and Old Age Security (OAS) payments, you will continue to receive these payments as they are not affected if you file for bankruptcy.
In addtion to CPP and OAS, other retirement income assets you will continue to receive because they are exempt from bankruptcy include:
- Registered Retirement Savings Plans (RRSPs), except contributions made in the 12 months before declaring bankruptcy
- Registered company pension plans (RPPs) and
- Locked-In Retirement Accounts (LIRAs), also known as Locked-In Retirement Savings Plans
Note, however, that the income you receive from these assets will be included in the calculation to determine if you have surplus income.
Retirement income funds not exempt from bankruptcy
There are types of retirement income that are not exempt from bankruptcy (unless subject to a registered security agreement). The following are subject to seizure by your Licensed Insolvency Trustee (LIT) to distribute to your creditors, and therefore, you would no longer receive income from:
- Savings Bonds,
- rental income,
- mutual fund payments, and
- marketable securities.
What is surplus income?
The Office of the Superintendent of Bankruptcy (OSB) has established a set of income levels that it considers to be required to maintain a reasonable standard of living while bankrupt.
Under the BIA, income above these levels is considered surplus income. During bankruptcy, you must provide your LIT with statements of your income and expenses every month. Your LIT will then determine if you have surplus income, and if so, whether you are required to make any surplus income payments.
How is surplus income calculated?
- The OSB determines the monthly income threshold by taking into consideration:
- the number of people in the family, and
- the family’s net monthly income and subtracting the monthly non-discretionary expenses applicable to the personal and family situations of both the bankrupt and the bankrupt’s family unit, such as child and spousal support payments. For separated or divorced spouses, the child tax will be considered part of the household income for the parent who has primary custody of any children.
- Once the monthly income threshold is determined, any income earned above this amount is considered surplus income.
For example, in 2018 the OSB’s family monthly income threshold for a single person is $2,152. That means any monthly net income amount over $2,152 is considered surplus income. So, if you earn a net income of $2,352 in a month, your surplus income would be $200 ($2,352 – $2,152).
For current monthly income thresholds and surplus income calculations, visit the OSB website.
Surplus income payments
Surplus income payments are made to your LIT to be distributed to your creditors.
- Less than $200: Where the bankrupt has monthly surplus income of less than $200, the bankrupt is not required to pay any amount to the bankrupt’s estate.
- $200 or greater: Where the bankrupt has monthly surplus income equal to, or greater than $200, the bankrupt is required to pay 50% of the monthly surplus income to the bankrupt’s estate.
What if you disagree with your surplus income payment amounts?
If you disagree with the surplus income payment amount, you can have your LIT request mediation with the OSB. If any of your creditors disagree with the amount of surplus income to be paid, they may also submit a written request to your LIT asking for mediation.
If, after mediation, you still don’t agree with the payment amount, the case may be taken to Bankruptcy Court.
If your wages are being garnished by a creditor, filing for bankruptcy or a consumer proposal will immediately stop the garnishment. Under the BIA your LIT can apply for an automatic stay of proceedings. Under a stay of proceedings:
- your employer is prohibited from deducting any more money from your pay, and
- your bank cannot garnish any more money from your bank account.
Your bank can fight this by requesting an express order from Bankruptcy Court, however, these orders are rarely granted. It is important to understand that filing for bankruptcy or a consumer proposal does not stop wage garnishment for child or spousal support.
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