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

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 11R2-2023 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.

3 Responses to “Bankruptcy Canada: do the surplus income rules discriminate against women?”

tina said...

Can a person that is 70 years old declare bankruptcy, even though she is married and both get the old age pension. This person needs to file by herself. the only income she has is her old age pension and she is about 40.000.00 in debt. thank you for your advise.

TrusteeJ said...

Yes, a person 70 years old can declare bankruptcy.

However, my standard advice is that the purpose of bankruptcy for many people is to prevent their wages from being garnisheed, so if you are on a pension, that’s not a concern, so bankruptcy may not be legally necessary. However, if the stress of the collection calls is a problem, bankruptcy is an option.

To fully assess your options, speak to a bankruptcy trustee before making any decisions.

Anonymous said...

Thank you for the great illustration