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Bankruptcy Canada: do the surplus income rules discriminate against women?

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

The year 2009 was an important year for bankruptcy legislation in Canada. On September 18, 2009 the bankruptcy rules changed, making it more expensive and more complicated to file bankruptcy for certain people, due to changes in the surplus income rules. Today’s question: do the surplus income in bankruptcy rules discriminate against women? First, some background:

Under the new bankruptcy Canada surplus rules, if you have surplus income greater than, on average, $200 per month, your bankruptcy is automatically extended for a further 12 months. Under the old rules a person who had never been bankrupt before would be automatically discharged in nine months in most cases. Under the new rules, a first time bankrupt with surplus income is now bankrupt for 21 months, and they are required to make surplus income payments for the entire 21 months. It’s easy to see how the new rules increased the cost of a bankruptcy in Canada for many people.

(For more information on surplus income, please see my articles on the new bankruptcy rules in Canada, and the most read post in the history of this blog: Surplus income rules and bankruptcy in Canada).

Here’s a simple example (if you want to see a lot of examples, please consult our surplus income calculation pages).

Mary Smith is a single person with no dependents, and she goes bankrupt for the first time. She earns $2,200 per month (take home pay, after taxes). A single person with no dependents in 2010 is allowed to earn $1,884 per month, so Mary is $316 over the limit each month, so she is required to make a surplus income payment to the trustee of half of her excess, or $158 per month. If you are more than $200 over the limit on average each month your bankruptcy is extended for 12 months. Since Mary’s income is $316 over the limit, she will be bankrupt for an additional 12 months, meaning that, if her income doesn’t change, she will be making surplus income payments of $158 per month for 21 months.

The rules are quite simple: if you earn over the limit, you pay more, and your bankruptcy lasts for an extra year.

(As an aside, my normal advice to a person like Mary would be to consider avoiding personal bankruptcy in Canada by filing a consumer proposal. With a consumer proposal you negotiate a settlement with your creditors for a fixed payment each month, so you don’t have to worry about making a surplus income payment if your income increases).

What if you are not single? Here’s another example: Let’s assume that Mary’s sister, Sally, also decides to file bankruptcy. Sally is married, so when calculating the surplus income for her bankruptcy, the calculation is done using the family income, which in Sally’s case includes her husband’s income. Here’s an example, assuming that Sally earns $2,200 per month, Sally’s husband earns $4,400 per month, and they have two children, so they are a family of four. The surplus income threshold for a family of four in 2010 is $3,501 per month. Here’s the math:

Sally’s net pay: $2,200

Sally’s husband’s net pay: $4,400

Total family income: $6,600

Surplus threshold (set by the government): $3,501

Amount that family income exceeds the threshold: ($6,600 – $3,501) = $3,099

Surplus income payment required if both Sally and her husband were bankrupt: (50% of $3,099) = $1,549.50

Sally’s portion of the payment (Sally’s husband isn’t bankrupt, and in this example Sally’s income of $2,200 is one third of the family income of $6,600, so she pays one third of the surplus payment required, 33% of $1,549.50): $516.50

So Mary, a single woman earning $2,200 per month, makes surplus income payments of $158 per month. Sally, a married woman with a husband and two children, also earning $2,200 per month, makes a surplus income payment of $516.50 per month.

Is it fair that Sally pays more than Mary in her bankruptcy, even though they both earn the same amount? The government would argue that yes, it is fair, because Sally’s family income is higher, so it’s only fair that she should pay more in her bankruptcy. Again, the theory is that the more income your family earns, the more you pay in a bankruptcy.

Now, here’s where it gets tricky. What if Sally’s husband refuses to divulge his income? Sally’s husband may say “Wait a minute; I’m not bankrupt, these are all debts that you had before we got married, so I refuse to divulge my income; I don’t think it’s fair that the trustee will make you pay more money in your bankruptcy just because I’m earning more money.” So how is the calculation done if Sally’s husband refuses to divulge his monthly income to the trustee? The government has a special rule for just such a case. If the non-bankrupt spouse refuses to divulge their income, the threshold is cut in half! So, for a family of four, instead of being allowed a threshold of $3,501, Sally will only be allowed a threshold of $1,750.50! Here’s the math:

Sally’s available monthly income: $2,200

Other family unit members’ available monthly income (spouse refuses to divulge income, so assumed to be zero): $0

Family unit’s available monthly income: $2,200

Minus Superintendent’s standard for a family unit of four for 2010: ($3 501 x 50%, since spouse won’t divulge income) = $1,750.50

Amount that family income exceeds the threshold: ($2,200 – $1,750.50) = $449.50

Surplus income payment required: ($449.50 x 50%) = $224.75

(NOTE: In case you think this is a made up example, it’s not. This is the example the government uses to illustrate this concept. You can read it here on Directive 11R2-2010 on the government’s web site).

As you can see, two sisters, both with the same income, end up paying two separate amounts. Mary, a single woman earning $2,200 per month, makes surplus income payments of $158 per month. Sally, a married woman with a husband and two children, where her husband won’t divulge his income, also earning $2,200 per month, makes a surplus income payment of $224.75 per month.

So now for the key question: is this fair? Is it fair that two women, earning the exact same amount, pay different amounts during bankruptcy in Canada?

To determine whether or not this is fair, we would need to know more about Sally’s situation.

Having Sally pay more is fair if her husband has high income, and he is using that income to support himself, Sally, and their family. It could be argued that Sally’s financial situation is better than her sister’s, because with both her and her husband’s income, they are better off. Mary does not need to spend as much of her paycheque on living expenses, because her husband is also contributing towards the family expenses.

Of course the opposite argument can also be made. What if Sally’s husband doesn’t contribute his fair share? What if he wastes all of his money on gambling and drinking, such that Sally has no choice but to use her entire paycheque each week to pay the rent, buy food, and support her family? Is it fair that Sally is required to pay more just because her husband is a deadbeat?

I started this discussion by asking the question “do the surplus income in bankruptcy rules discriminate against women?” Obviously the surplus income rules are not gender specific. If we replaced Mary and Sally with Bob and Fred in these examples, the math would be the same. It’s quite possible for a husband to go bankrupt, and his non-bankrupt spouse could refuse to divulge her income. However, in my almost 25 years working with people in financial trouble, it is my experience that it is far more likely for a husband to refuse to divulge his income than it is for a wife to refuse to divulge her income. It is therefore more likely that a women will pay more in this situation than would a man.

So, in that specific case, yes, the surplus income in bankruptcy rules do discriminate against women.

What’s the solution?

First, let me make it clear that I don’t believe all men are deadbeats, spending all of their money on gambling and drinking. I happen to be a man myself, and I don’t gamble, and I don’t spend the grocery money on drinking. Over the years I have met with thousands of couples, and even when only one of the spouses has debt problems, it’s not all uncommon for the other spouse to be very supportive, and to want to do whatever they can to help their spouse get out of financial trouble.

Second, the non-bankrupt spouse may be refusing to divulge their income for perfectly good reasons. In the example above I assumed that Sally’s husband was a deadbeat, and that’s why he wasn’t co-operating. In fact, the exact opposite might also be true. Sally’s husband might be doing everything in his power to help his wife. He may have done the math, and realized that Sally would be better off if he didn’t divulge his income. In my example above where Sally’s husband earned more than she did, she ended up paying $516.50 per month in surplus income payments. When he refused to divulge his income, she was only required to pay $224.75. So, if Sally’s husband earns more than she does, Sally is better off if he doesn’t divulge his income.

How confusing is that? If Sally’s husband wants to help her, he will:

  • disclose his income if he earns less than Sally;
  • if he earns the same as Sally it doesn’t matter, the payment will be the same if he divulges or doesn’t; and
  • he will refuse to disclose his income if he earns more than Sally, since Sally will end up paying less.

A word of caution: in my example I assumed a family of four. The results will be different if Sally and her husband have no dependents. The answer is not as simple as “disclose if non-bankrupt spouse has lower income, and refuse if their income is higher”; each case may be different.

What’s my conclusion? There are cases where the rules may not appear to be fair. The surplus income in bankruptcy rules in Canada are very complicated. There are literally an infinite number of possible outcomes.

For your protection, it is absolutely critical that before you decide to file bankruptcy, you have a detailed consultation with a licensed bankruptcy trustee, and you ask them to explain, in detail, how your surplus income payment will be calculated in your case. Spending ten minutes with a trustee and a calculator will help you prepare for your bankruptcy. The rules are complicated, and there may be cases where they don’t appear to be fair, but with proper research you can understand how the rules will effect you, and you can be prepared for all possible situations.

Posted on Monday, April 12th, 2010
Filed under: bankruptcy Canada andbankruptcy reform andConsumer Proposal
posted by Doug Hoyes @ 5:05 am No Comments

The Price of Progress: New Bankruptcy Rules Hurt Some People They Were Designed to Help

by Barton Goth

Barton Goth, Canadian Bankruptcy Trustee

Barton Goth, Bankruptcy Trustee

One of the longstanding and fundamental purposes of the Bankruptcy and Insolvency Act of Canada has been to allow honest but unfortunate debtors to deal with unmanageable debt so that they can make a fresh start and resume their places in the community. For those of you who are unaware, September 18, 2009 was a very significant day in the Canadian Insolvency community, as some major amendments to the Bankruptcy and Insolvency Act were implemented. Many of the changes greatly anticipated and long overdue, some examples include:

  • Increasing the limits for consumer proposal from $75,000 to $250,000 in non-mortgage debts;
    Reducing the time limit that must elapse prior to Student loans being eligible to be discharged from 10 years to 7;
  • The creation of a federal exemption making RRSPs now exempt from seizure;
  • Implementing a clause that stipulates secured loans and leases cannot be terminated simply due to the filing of a bankruptcy;

As you can see, many of these new amendments are very positive and go a long way to enhancing our current insolvency system. However, as with any type of change often there are unanticipated consequences and it is these unanticipated consequences that cause me some concern. While the vast majority of these amendments were positive, I feel that there are a few that are not consistent with the original purpose of this legislation.

For example, earlier this week I met with a 56 year old gentleman who had recently suffered a very serious heart attack and as a result is awaiting surgery. This heart attack has dramatically changed his ability to function on a daily basis and left him unable to work in his field of expertise. As I met with this individual, I learned that he had been bankrupt before. In fact, he filed for bankruptcy in 1981. This bankruptcy was largely a result of conditions that were beyond his control. At the time he was operating a small proprietorship that was servicing the oil and gas industry and, by all accounts, was doing reasonable well for himself.

But unfortunately, as many people may remember, this was a very difficult time in the oil and gas sector due to a combination of political and market conditions. As a result, this gentleman was one of many who was left without work and no prospect of work for quite some time. Without going into too much detail, this first bankruptcy, which occurred approximately 28 years ago, proceeded smoothly and a discharge was successfully obtained without any difficulties, and from by all appearances this gentlemen seems to have spent the last 28 years working hard to raise a family and support 5 children.

Throughout this time he has remained steadily employed, made regular contributions to an RRSP, only once had to rely on Employment Insurance and overall appears to have done everything that could be expected. Having learned his lesson from the first bankruptcy, he didn’t regularly carry large amounts of debts, has always driven used vehicles and seems to have been fairly prudent. Unfortunately this all changed on July 15, 2007, the date of his first heart attack. This first heart attack wasn’t terribly serious in the grand scheme of things, but it was the first of three, and the third heart attack was very severe, so severe that he is now awaiting surgery and has been told that he will never be in a position where he will be able to resume his previous activities.

The net effect of all of this is that since July 15, 2007 he has only been able to work intermittently. At first they were able to rely on his wife’s income and some Employment Insurance benefits and this worked well until near the end of 2007, when his wife was laid off. As a result of this lay off they had to use most of their RRSP’s to survive, as the small disability pension simply wasn’t enough. This seemed to work until the RRSP’s ran out and being left with no other choice they began to supplement their deficit each month with credit cards and the like, all the while planning on paying things back as his health improved.

So now this man and his wife live very modestly and try their best to survive on total household income of $3400, of which he was bringing in an estimated $2360 net each month. As I visited with this couple, it was very clear that I was dealing with honest people who were in a very unfortunate position. The end result is that they can afford to live, but they cannot afford to pay back an estimated $58,000 of debt, when you factor in the shortfall from the truck that used to be required for work.

Here is the problem: based on the changes to the Bankruptcy and Insolvency Act this person the estimated cost of bankruptcy in this situation would be $409.88 a month, an amount that will be a struggle to pay. This payment will also last for a total of 36 months, which will result in a total cost of a bankruptcy of approximately $14,755.76. While this is obviously a fraction of the total debt, we have a two people on the verge of retirement who are supposed to be in some of their highest paid years in the job force, who now have to struggle for the rest of their lives just to get by.

Now the question I have been wrestling with is whether or not this is consistent with the overall goal of a system that permits an honest debtor, who has been unfortunate, to secure a discharge so that he or she can make a fresh start?

This is an example of one of the unanticipated consequences that unfortunately represent the price associated progress. Not to suggest that this is the only problem with the legislation, but it is simply an example that I use to demonstrate some of the difficulties that still remain. While I don’t believe this was intended by anyone involved in the process and credit many of the misgivings implicit in these amendments to the manner in which this legislation had to be rushed through the legislative process in an effort to gain approval prior to falling of a minority government.

I do believe that it is important for Insolvency Professional’s across Canada to do our part to identify the remaining issues in an effort to make sure that the Superintendent of Bankruptcy, our Federal Government and of the other stakeholders recognize that while improvements have been made, there is still work that needs to be done.

For those of you are curious about what can be done when if you are in a situation similar to the one above, the best advice is to talk to a local trustee. In the above situation, the debtor decided that the filing of consumer proposal was going to provide a way to avoid a bankruptcy and some of the more negative consequences of a second bankruptcy but still enable a way to deal with the debt in a manner that reduced the total amount he would have to pay and to do so in a fashion that would fit into his budget.

Posted on Monday, November 30th, 2009
Filed under: bankruptcy Canada andbankruptcy reform
posted by Barton Goth @ 9:53 am No Comments

The Insanity of the New Bankruptcy Rules in Canada

by Ted Michalos

Ted Michalos, Bankruptcy Trustee

Ted Michalos, Bankruptcy Trustee

On September 18, 2009 the government of Canada brought into force all of the remaining amendments to the Bankruptcy and Insolvency Act that were approved by Parliament back in 2005 and 2007.  At the time they were approved, the economy was booming and bankruptcy filings by individuals were stable.  One of the goals of the new law was to encourage people to consider filing a consumer proposal as an alternative to personal bankruptcy.  The law did this by dramatically increasing the cost of filing personal bankruptcy.

In 2005 the economy was booming. Today, the economy is in shambles.  Personal bankruptcy filings are at an all time high.  Unemployment is rising and people that in the past had no concerns about their jobs are now afraid that they may get “downsized” too.   So, at a time when a record number of Canadian families are experiencing financial difficulties, what does the government do?  They bring into force all the changes they passed when times were good.  Insanity.  There is no other word for it.

In a strong economy, the plan of increasing the cost of bankruptcy in Canada to encourage people to file more consumer proposals made a certain amount of sense.  If a person is working with a stable income, then you can argue that they should try to repay part of their debt.

In a weak economy, with unemployment on the rise, EI benefits running out, and no prospects of a “job rebound” in sight all these new rules do is force people that have no realistic ability to repay a portion of their debts (via a proposal) to remain in bankruptcy for a much longer period of time.

So that we’re clear, the new rules extend a first time bankruptcy for individuals from 9 months to 21 months, if their household income is $200 above the government standards.  For example, a family of 4 is allowed income of $3,474 per month.  If they have income in excess of $3,674 per month their bankruptcy will be automatically increased from 9 to 21 months.   Every month you remain bankrupt there is a cost (payment) that must be made.  Let’s say they were required to pay $250 per month.  Under the new rules they’d be required to pay $250 per month for 21 months, or $5,250.  Under the old rules the total payment required would be only $2,250 ($250 per month for nine months).  That’s quite a difference for a family struggling to pay the rent.

A single person has a surplus income threshold of $1,870.  So, if they earn $2,070 per month or more their bankruptcy will run 21 months.  The fellow on EI won’t get caught by this rule – their income will be below the $2,070 limit and their bankruptcy will run 9 months.  If, however, they find work during the bankruptcy, such that their income rises above the limit the law automatically kicks in and they are required to pay for 21 months.

A lot of people may read this and say, “ok, bad luck for them, but it is still less than what they owe”…  That is true, but what most people don’t realize is that more than 10% of all Canadians will file for bankruptcy at some point in their lives.  If one of the goals of the new law was to encourage people to file consumer proposals (instead of bankruptcy), it does not make any sense to bring those rules into place when the economy won’t allow people to file a proposal.  The income is simply not there.  Insanity is the politest word I could find for it…

Posted on Monday, October 19th, 2009
Filed under: bankruptcy Canada andbankruptcy reform andConsumer Proposal
posted by Ted Michalos @ 5:02 am 1 Comment

The New Bankruptcy Rules: Some Predictions

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

Since the federal government announced back on August 19 that new bankruptcy rules in Canada would come into force on September 18, 2009, I have posted three articles describing the new bankruptcy rules in Canada. For an overview of the new rules, please see the following articles:

As promised, the new rules came into effect on September 18; what happened? Here’s an insider’s view:

My firm, Hoyes, Michalos & Associates Inc., serves debtors from 20 offices in Ontario, so we have a large representative sample of people in financial trouble. As soon as the new rules were announced, we received a flood of calls from people in debt. Many of them wanted to file before the new bankruptcy rules were implemented, because under the new rules if you have surplus income of more than $200 per month, your bankruptcy is automatically extended for an extra year. For example, in a first bankruptcy under the old rules $300 per month in surplus income would still mean you were probably discharged in nine months. Under the new rules, you are now automatically bankrupt for 21 months, and that means you are now paying for 21 months. In short, your bankruptcy will cost twice as much as before, which is what caused the flood of calls to our offices.

As a result, on September 17 we filed three times as many personal bankruptcy filings as we would on a normal day. In fact, across Canada there were about 1,700 personal bankruptcies and consumer proposals filed, which is also about three times the normal number. Obviously Canadians wanted to get their bankruptcy filed under the old rules.

Here’s another interesting note: On September 18, the first day of the new rules, the government’s electronic bankruptcy filing system was down! As a result, there were no bankruptcies filed on Friday September 18. I’m amazed that the system would not work given the many years the government has had to implement the new rules, but that’s the way it goes sometimes.

What do I see for the future? I have two predictions.

First, I suspect that all bankruptcy trustees in Canada will be doing some very detailed math to explain the surplus income calculation to every debtor before they file bankruptcy. Seven months into each bankruptcy the trustee is required to determine the bankrupt’s average income over the first six months, and if their average income per month is more than $200 over the limit, the bankruptcy is extended. If a bankrupt is paid a salary twice a month, their income doesn’t change, so the calculation is easy.

But what happens if you are paid either weekly or bi-weekly? If you get paid weekly, there are four months each year where you get five paycheques per month, and that may cause your average surplus income to exceed the limit. The same is true for a person paid bi-weekly in a three paycheque month. I suspect that the result of these new rules will be that bankrupts may delay their filings until after their extra paycheque month.

For example, if you are paid weekly on a Friday, a quick check of the calendar will reveal that there are five Fridays in October. That may mean that weekly payees will want to wait until November to go bankrupt. When you meet with your trustee, be sure to ask them to explain the implications of these new rules in your specific situation.

Second, as I have already predicted, I believe the number of consumer proposals will increase. If you are expecting a Christmas bonus, or overtime, that may be enough to increase your income such that your bankruptcy will last for an extra year. In that case a consumer proposal may be the preferred solution. You can negotiate a set monthly payment that won’t increase, even if your pay goes up.

All trustees in Canada are quickly learning and adapting to the new rules, so it is imperative that you consult a Canadian bankruptcy trustee to review how these new rules will impact on your situation, so that you can make a fully informed decision to deal with your debts.

Posted on Monday, September 21st, 2009
Filed under: bankruptcy Canada andbankruptcy reform
posted by Doug Hoyes @ 1:49 am No Comments

New Bankruptcy Rules in Canada: The Bad News, and the Good News

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

After waiting for four years, the new bankruptcy rules finally come into force on September 18, 2009. The new rules will have a significant impact on many Canadians in financial trouble.

When the new rules were announced in August I posted a summary of what you need to know about the new bankruptcy rules in Canada. If you are not familiar with the new rules, this is a good summary.

I also posted an article on the most radical new change: the surplus income rules have changed, so bankruptcy will now last longer for many Canadians. Under the old rules most first time bankruptcies lasted for nine months. Now, if your monthly net income is more than $200 higher than the limit set by the government, your bankruptcy will last an extra year, and you will be required to make payments to your creditors for an extra year.

Here’s a simple example: Fred is single with no dependants, and he earns $2,470 per month in take home pay, after taxes. The surplus income threshold for a single person in 2009 is $1,870 per month, so Fred has $600 per month of surplus income. He is required to pay $300 per month in surplus income payments for the length of the bankruptcy.

Under the old rules if this was Fred’s first bankruptcy and there were no objections, Fred’s bankruptcy would probably last for nine months, so his surplus income payments of $300 per month would last for nine months.

Under the new rules Fred is automatically bankrupt for 21 months, so his surplus income payments of $300 per month will last for 21 months.

That’s the bad news. The good news is that it will now be easier to file a consumer proposal as I reported last week. Under the old rules you could only file a consumer proposal if your debts were $75,000 or less. Now you can file a consumer proposal if your total debts, not including the mortgage on your principal residence, are less than $250,000. That will make it easier for many Canadians to avoid bankruptcy and file a consumer proposal.

Unfortunately it was only on August 19, 2009 the government announced that these new rules were coming into force on September 18. That means that trustees across Canada have only had 30 days, in the middle of the summer vacation season, to prepare for the new rules. That means there will be lots of confusion surrounding the new rules, so we will all need to be patient as we work through the new calculations, rules and directives.

My biggest complaint is that these new rules were created back in 2005 when the Canadian economy was booming. The federal government decided that the bankruptcy process was too easy, and needed to be lengthened. That may have made sense in 2005, but it’s now 2009 and we are in the middle of the most serious recession in our lives. Now is not the time to make the bankruptcy process even more difficult for the average Canadian. In hindsight it would have been nice if the government had delayed lengthening the bankruptcy process until the recession was over.

I also worry that the government has introduced new disclosure requirements. Now, when you go bankrupt in Canada, you are required to disclose your highest level of education. You must now tell the creditors whether or not you graduated from high school or university. Personally, I find this new disclosure requirement offensive. I don’t think whether or not you are a high school graduate is relevant. The creditors need to know what you own and who you owe, but information about your educational background is not necessary for them to evaluate your situation. What’s next? Questions about your ethnic background? Religion? Where does this end?

However, regardless of my opinions on the new rules, they are here. Some people will benefit from the new rules, others will not. Regardless, you should deal with a trustee that fully understands the new rules, so please consult a Canadian bankruptcy trustee to arrange a no charge initial consultation to review your situation and determine which option is best for you to deal with your debts.

Posted on Monday, September 14th, 2009
Filed under: bankruptcy Canada andbankruptcy reform andConsumer Proposal
posted by Doug Hoyes @ 4:05 am 3 Comments

Surplus Income: How the New Rules Could Extend the Cost of your Bankruptcy in Canada

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

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 on Monday, August 24th, 2009
Filed under: bankruptcy reform
posted by Doug Hoyes @ 5:09 am 18 Comments