Doug Hoyes, Bankruptcy Trustee
New bankruptcy rules will come into force in Canada on September 18, 2009. Last week I reviewed What You Need to Know About the New Bankruptcy Rules in Canada. Today I’d like to comment on the most radical change: how your income will impact on the length of your bankruptcy in Canada.
When you go bankrupt, you are required to report your income to your trustee each month. The more you make, the more you are required to pay. This rule exists based on the theory that a wealthy doctor that goes bankrupt (perhaps due to a bad business investment) should be required to contribute more to his creditors than a single mother with minimal income.
The government sets limits on how much you can earn, and if you earn more than that amount you pay a portion of your surplus income into your bankruptcy estate. Each month that you are bankrupt you are required to send copies of your pay stubs and proof of other income to your trustee, and your trustee then determines what you must pay. For example, in 2009 the limit for a single person is $1,870 per month. If your take home pay is more than $1,870 per month, you are required to pay half of the amount you are over the limit to the trustee. So if you earned $2,270 this month, you are $400 over the limit, so you would pay an extra $200 this month to the trustee, who would then include that money in the funds to be distributed to the creditors.
As I described last week, under current rules you are only required to pay for nine months, unless you were bankrupt previously, or have excessive income, or if a creditor objects to your discharge.
If you file bankruptcy after September 18, 2009 and if you have surplus income, you will be automatically bankrupt for 21 months, or 36 months if you were previously bankrupt. That means that for many Canadians what would have been a 9 month bankruptcy may now be a 21 or 36 month bankruptcy, with the payments based on your income continuing for 21 or 36 months. In other words, for Canadians with surplus income, the cost of bankruptcy just went up. Way up.
Why did the government decide to make bankruptcy more expensive? It may be because they don’t want bankruptcy to be seen as an “easy” way out of financial trouble. If you have low income the rules don’t change, but if you earn a lot, bankruptcy will be much more costly.
It’s also possible that by making bankruptcy more expensive, the government hopes to encourage more consumer proposals as an alternative to bankruptcy. I agree with exploring all alternatives to bankruptcy, and I agree that for many Canadians a consumer proposal is a better option. Was it necessary to change the rules to encourage more consumer proposals? Perhaps, although perhaps education instead of punitive new rules would have proven just as effective.
Regardless, the rules are changing, so how should you proceed if you need to go bankrupt?
First, make sure you understand all of your debt management options. Bankruptcy may be more expensive, so it should be the last option you consider, not the first.
Second, be sure you fully understand exactly how surplus income will be calculated during your bankruptcy. Ask your trustee to do the calculation with you before you file bankruptcy. Here’s an example of why the precise calculation will be so important:
Your trustee is required to calculate your surplus income each month. Before the end of the eighth month of your bankruptcy (if this is your first bankruptcy), the trustee will take the average of your surplus income. If, on average, your income was more than $200 per month over the limit, your bankruptcy is automatically extended from 9 months to 21 months. If your income is the same each month, averaging won’t make a difference.
However, most Canadians get paid either bi-weekly or weekly, meaning that in a typical month they get 2 or 4 paycheques, but depending on how the calendar falls they could receive 3 or 5 paycheques, which will obviously increase their income. In some cases it may be wise to file bankruptcy in the month after your extra paycheque month, so that your average income is lower during the bankruptcy period, potentially resulting in a shorter bankruptcy.
If your employer pays an annual bonus, perhaps in the summer or before Christmas, it may also be prudent to delay filing the bankruptcy until the month after you have received the bonus.
If you can’t wait to file, it may be prudent to file a consumer proposal and avoid the implications of surplus income altogether.
My point is that these new rules won’t simply require a bankrupt to pay more, but they may also require you to pay more for an extended period of time, so it is critical that you fully understand the new rules. Make sure your trustee has fully explained all of the implications. If you don’t understand the explanation, ask again, or find another trustee.
Do your research on the new bankruptcy rules, and then contact a licensed bankruptcy trustee to review your situation and explain to you in detail how the new surplus income rules will impact on your bankruptcy.
posted by Doug Hoyes @
15 comments:
What you sites/trustees, etc. need to ensure is some of the grey matter. You point out the procedures, etc. costs, length of time, options, etc. NOBODY POINTS OUT THE CONSQUENCES, E.G. 3,6, MONTHS PRIOR TO YOUR BANKRUPTCY. E.G. YOUR RECORDS. your sites are not spelling out many details, for example, ‘be sure you don’t use your credit or line of credit, 3-6 months prior to bankrupty’ (which is totally absurd, one NEEDS to use it, obviously! ) or you take out money from your line of credit, (to manage from), well that might hurt you also, credior might oppose OR you find out near the end of your discharge, “gee, not going to get out..” PLEASE PUT ON YOUR WEBSITES, VITAL INFORMATION, ABOUT 3-6 MONTHS USEAGE ON CREDIT CARDS OF LINE OF CREDIT, COULD HURT US. YES, OBVIOUSLY THERE IS ABUSE, BUT I’M JUST CONCERNED ABOUT HAVING TO USE IT DUE TO LACK OF FUNDS, NO JOB, ETC. ETC. DOES ANY SITE OR TRUSTEE ALSO STATE ON THEIR SITES WITH ALL THE OTHER SO CALLED VAST INFORMATION THAT ‘creditors’ will view back your statements 3-6 months or so, to see your activity, therefore may oppose your discharge?’ NO, NOBODY SAYS THIS ON THEIR SITES.
point 2 – what about trustees who advise you not to use your credit for in you know you are going into banktruptcy? This spooks me. Creditors can appose. I would think by NOT keeping up payments or something towards it, that could antagonise them to propose your situation. Wouldnt it be wise not to get on the WRONG SIDE OF CREDITORS,
Unfortunately general information web sites cannot cover every possible circumstance. I know that at our firm we specifically ask all debtors whether or not they have borrowed money or used credit cards in the past three months, and then we advise them on the implications.
I disagree with your comment that it is totally absurd to suggest that you should stop using your credit cards in the 3-6 months before bankruptcy, since one “NEEDS to use it, obviously.” Once you go bankrupt you will not have credit cards, so you will be forced to stop using them then; it’s best to stop using them now. You can survive because you will also stop making payments on those debts.
Your comments are important, so I will add to my list for future articles a discussion of credit use before bankruptcy.
Hi, just a quick question,; if a person works as a subcontractor, receives weekly cheques how does count? Subcontractors pay is only gross income, after business expense the personal income is usually 60-80% less. So what they have to report as an income?
Thanks, Zoltan
You kept saying “the new rules of surplus income”? We declared bankruptcy in July 09 and we have just received a letter stating that they have averaged out what we will make as a surplus for the 12 months after the 9 months (which is way off!) and want us to agree to pay in full? We are going to dispute but then what? My husband is in the forest industry – there are no gaurantees of what he will make…
My question is this. What happens if your income drops SIGNIFICANTLY from when you first filed for bankruptcy, for example from loss of job or cut-back of hours of work? Will a 21 month bankruptcy be reset to 9 months if it so happens that the average surplus over 9 months is lower than $200?
Thank you.
In comments above after declaring bankruptcy is that suggestion stop paying your min monthly payments 3-6 months before in addition to also stop using credit cards?
Here are some further answers to the comments posted:
Zoltan: All bankrupts report their net income, so a self-employed person would prepare a monthly statement for the trustee showing their gross income, and their allowable business expenses, and their net income. It is the net income used for calculating surplus income.
Lorraine: The new rules that took effect in September, 2009 automatically extend a bankruptcy for 12 months if you have surplus income (defined as earning an average of over $200 per month over the limit set for your family size). Prior to September 18, 2009 the trustee, the creditors or the courts could extend a bankruptcy for excessive surplus income. For large surplus income it was not uncommon for a bankruptcy to be extended for 12 months, but it was up to the court’s discretion. The new rules remove the court’s discretion.
TD: Each month you are bankrupt you report your income to the trustee. At the end of six or seven months the trustee will average your income, and based on that average your bankruptcy will be extended for 12 months if you have excess surplus income. The determination is not made at the start of your bankruptcy. Once the bankruptcy is extended and the amount you are required to pay is fixed, the bankruptcy runs for an additional 12 months. If your income then drops (say in month number 14), there is a procedure to adjust your payments if appropriate.
David: All credit card use in the three months leading up to bankruptcy is generally reported by the creditors to the trustee. Some creditors will review your transactions going back a year or more prior to bankruptcy. As soon as you are aware that you will be unable to pay your debts and you will be going bankrupt, you should stop using your credit cards. Using credit cards while you know you are insolvent is fraud. Once you know you are insolvent you probably don’t have the money to continue making payments, which is why in most cases once the decision is made to file bankruptcy, you no longer use your cards, or make payments on them. Your trustee can explain in more detail based on your specific situation.
My question is In Mike Harrison comments above “BEFORE declaring bankruptcy” is that suggestion stop paying your minIMUM monthly payments 3-6 months before “THE ACTUAL DATE I FILE BANKRUPTCY SUBMIT TO BAKRUPTCY OFFICE AFTER PAPERWORK” in ADDITION to ALSO stop using credit cards?
In general, as soon as you realize that you are insolvent (unable to pay your debts) you should stop using your credit cards. If you are insolvent, that probably also means you don’t have the money to pay your credit cards, so you will also stop paying them. However, once you stop paying your credit cards, your creditors will begin to pursue you (with phone calls, letters, and perhaps court action), so that’s when you will probably begin the bankruptcy process. The timing of each situation is different, so I recommend you speak to a local bankruptcy trustee to review your specific situation.
I have a question regarding the below answer you had given to someone above.
If my suplus income was minimal and just over the $200 per month averaged over the first 9 months and they extend the bankruptcy to 21 months and set a rate to be paid during the extended 12 months.
What are the implications once surplus income is calculated and I have a wage in increase due to a job change? Does the surplus income payment go up? What if I have to sell my house during the 10 to 21 month period and end up with any profit?
I guess what I am asking is on the extended part of a bankruptcy do the same rules apply that are for the initial 9 months?
Thanks
TD: Each month you are bankrupt you report your income to the trustee. At the end of six or seven months the trustee will average your income, and based on that average your bankruptcy will be extended for 12 months if you have excess surplus income. The determination is not made at the start of your bankruptcy. Once the bankruptcy is extended and the amount you are required to pay is fixed, the bankruptcy runs for an additional 12 months. If your income then drops (say in month number 14), there is a procedure to adjust your payments if appropriate.
Ian: In a first bankruptcy, the trustee is required to calculate your average income after at least six months in your bankruptcy. If at that time your average income is more than $200 per month over the limit allowed (based on your family size), your bankruptcy is automatically extended for a further 12 months (21 months in total). The trustee must continue to obtain proof of your income until the trustee files Form 82, “The Trustee’s Report on the Bankrupt’s Application for Discharge.” Once that report is filed, the trustee may continue to obtain proof of your income, but they are not required to.
Obviously that is not a very clear answer, and because these rules are relatively new, there is no jurisprudence to provide any direction. Therefore I can only suggest you discuss this in detail with your trustee, to see how they expect to be interpreting the rules in your case.
As for selling your house, yes, if you sell your house during the 21 month period for more than it was originally appraised at, the trustee would take that increase in value. In other words the same rules apply during the entire 21 months of the bankruptcy with respect to assets.
Again, these are complicated questions, so you should review them in detail with your trustee.
We filed for bankruptcy Nov 08, my husabnd was discharge as of July 09, mine was extended for 4 months based on surplus income. I recieved a letter from the trustee expalining I had until July 10′ to pay in full the outstanding owed balance ( accumualtion of surplus income and trsutee fees). Since the letter my level of income has changed, what happens if i am not able to pay the outstanding amount ? Will I be un-protected by bankruptcy proctection from my debts in filing bankrupcty in 08′? What happens and what is the process?
I have contacted my trustee and was informed that the only option was to have the amount paid in full by July ’10, is this so?
L
Since each case is different, and since your bankruptcy was commenced under the pre-September 2009 rules, you should discuss this in detail with your trustee. I would suggest you book a meeting with your trustee and ask them to explain in detail what is required to complete your bankruptcy. You will want to know exactly what is owing, and how you can pay it. You will also want to advise them of your change in income, to see if that will change the amount you owe.
Ultimately if you don’t agree with the trustee’s decision, you can request a court discharge hearing, where you explain your situation to a bankruptcy judge or Registrar. Since the courts have different approaches throughout Canada, your trustee, or a bankruptcy lawyer, are the best people to give you advice on your specific situation.
I am still confused regarding the answer to TD. I know that if your income above the threshold of $1884 (for a single person) is over $200 ($2084 net monthly) the bankruptcy is 21 months, asumeing first time. However, what if the first time single bankrupts income is below $2084 net monthly?
Example: a single person during bankruptcy is paid by salary, net monthly of $2028 every month with no income changes – therefore; $144 over the threshold of $1884 each month. Is a payment of $72 required (50% of $144) and will the single bankrupt person be discharged after 9 months?
Good question, and yes, these rules are very confusing. Here’s the answer:
If the bankrupt’s average income is less than $200 over the limit, they are not required to pay the surplus income penalty ($72 in your example), and if they have completed all of their other duties, they would be discharged in nine months.
The confusion arises due to the fact that average income can only be calculated after a minimum of six months. So, each month the trustee will tell you what is owing for surplus income; what you will actually be required to pay will not be determined until the averaging is completed, generally in month seven or eight of the bankruptcy.
As this is a confusing area, you should consult with a trustee to fully understand the calculation that will be done in your situation.