Surplus Income Penalty: How to Avoid it In a Consumer Proposal

associate working with a client on their consumer proposal

Surplus income can be a tough concept to grasp when first learning about bankruptcy and its rules. It refers to the amount of money you make that is more than the government‘s guidelines (we’ll go into more detail below).

When searching for debt-relieving solutions, you’ll find that the most popular options include filing for bankruptcy and or a consumer proposal. At first glance, bankruptcy may seem like an effective solution to achieve a fresh start financially.

While it’s a known fact that individuals may have to give up certain assets, many people fail to realize that they might need to contribute a portion of their monthly income as well. Consumer proposals also offer plenty of benefits, although they have their own set of rules and guidelines to abide by.

Understanding how surplus income works and what alternatives are available will help you avoid this penalty and keep your hard-earned money.


What You Need to Know About Surplus Income Penalties

When bankruptcy rules were created, something was needed to balance the need to eliminate your debts and be fair to the owed creditors, hence the creation of surplus income.

To put it simply, the more money you make, the more you are required to pay into your bankruptcy. While you would be allowed to keep a portion of your income that the government deems necessary for living expenses, your remaining monthly income will go to paying off your debts.

When calculating your surplus income payments, several factors are taken into account, including your monthly income, family size, and your family’s non-discretionary expenses.

Each month you are required to submit proof of your earnings, child support, and other cash inflow to your trustee. If you’re making over the limit set by the government, then you’ll be subjected to the surplus income penalty.


How Does a Consumer Proposal Work?

If you expect that your income will be increasing during the time you’ll be filing for bankruptcy, filing a consumer proposal instead will help you avoid paying a surplus income penalty.

When filing for a consumer proposal, your creditors must get more money than they would recover from bankruptcy.

To determine how much money you’ll be required to offer, a trustee will calculate surplus income payments and other asset values available to your creditors in bankruptcy. Although you’ll need to offer more money to your creditors, the payments will be spread out over a longer period, decreasing your monthly payment to make it more affordable.

If the creditors agree with the payment terms, then no matter how much your income increases, your payments in the consumer proposal will be fixed and cannot be subject to change.


Evade Surplus Income Penalty by Filing for a Consumer Proposal

A consumer proposal is one of the best solutions for dealing with debt, as you don’t have to give up your assets or pay a surplus income penalty.

Our team of experts at Lazard and Associates is here to help you navigate through your debt and regain control of your finances. You can count on us to provide you with valuable guidance that’ll help you reestablish your credit, pay off your debts, and avoid bankruptcy.

Get in touch with us to learn more about consumer proposals and book your consultation today.

Surplus income Frequently Asked Questions

What You Need to Know

The following questions are some of the common questions we get
asked about surplus income and consumer proposals.

To calculate your surplus income payments, begin with your net family income and subtract the government guidelines amount you’ve been given for living expenses. 

Our trusted Licensed Insolvency Trustees will help you determine if you have to make payments and the exact amount you’re required to pay.  

Surplus income payments only apply to bankruptcy. If you believe your income will increase during the time in which you’ll be filing for bankruptcy, a consumer proposal may be a better option for you. 

Speak to one of our Licensed Insolvency Trustees to determine the best option for your situation. 

A consumer proposal is a formal, legally binding process that is administered by a Licensed Insolvency Trustee (LIT). This proposal is developed by an LIT as an offer to pay your creditors a percentage of what you owe over a set period of time. If accepted, you are then responsible for paying the set amount under any conditions in the proposal.

Personal bankruptcies are quite complex and seen as a last resort when you owe a lot of money. Bankruptcy destroys your credit completely, but it gives you the opportunity to pay down some of your debt and even have some of it eliminated entirely over time. For more info on bankruptcy, contact us.