Surplus Income in Bankruptcy Explained

Key Takeaways

• Surplus income is the portion of your income above a government-set threshold that must be paid to creditors during bankruptcy.

• If your income exceeds the threshold, your bankruptcy duration increases to 21 months, or up to 36 months for a second bankruptcy.

• Surplus income rules are designed to ensure fairness, but a consumer proposal may offer more predictable payments and a shorter term.

• A Licensed Insolvency Trustee (LIT) helps you navigate surplus income calculations and explore bankruptcy or consumer proposal options.

Facing Bankruptcy? Here's Why Surplus Income Matters

If you're considering bankruptcy as a way to get out from under overwhelming debt, one of the most important and most misunderstood parts of the process is something called surplus income.

In Canada, bankruptcy is designed to be fair to both debtors and creditors. That means if your income rises above a certain government-set threshold, you may be required to make additional payments. These payments are called surplus income payments, and they can increase both the cost and the duration of your bankruptcy.

Understanding how surplus income works and how it compares to a consumer proposal can help you make the right decision for your situation.

What Is Surplus Income in Bankruptcy?

Defined by the Bankruptcy and Insolvency Act (BIA)

The concept of surplus income comes directly from the Bankruptcy and Insolvency Act (BIA), the federal law that governs all personal and corporate bankruptcies in Canada.

The idea is straightforward: if your income is more than what the government considers necessary to live modestly, you’re expected to contribute a portion of that surplus to your creditors during bankruptcy.

How Monthly Income Thresholds Are Set

The Office of the Superintendent of Bankruptcy (OSB) publishes updated guidelines each year. These guidelines set out what is considered “reasonable” income based on your household size.

For example:

• A single person might have a monthly income threshold of around $2,600.

• A family of four might have a threshold closer to $5,000.

If your income is above that line, you’ll be asked to contribute 50% of the surplus amount toward your bankruptcy estate for your creditors.

This Isn’t a Penalty. It’s a Fairness Rule

The surplus income rule isn’t designed to punish you. It’s there to ensure that if you earn more, you contribute more. At the same time, it allows lower-income Canadians to get a fresh start without being overburdened.

How Surplus Income Is Calculated

Step-by-Step Breakdown: A Real-World Example

Let’s consider Denise, a 38-year-old single parent with two kids. She works full-time and earns $4,300/month.

• The OSB threshold for a household of three might be $4,000/month.

• That means Denise is $300 over the limit.

• She would be required to pay 50% of that surplus—$150/month—into her bankruptcy estate.

Over the typical 21-month period for first-time bankruptcy with surplus income, that’s $3,150 in total payments—plus tax refunds.

What Counts as Income?

Surplus income includes:

• Employment income (wages, bonuses, overtime)

• Child/spousal support received

• Self-employment income

• Government benefits (EI, CPP, OAS)

It does not include:

• Child tax benefits

• GST/HST credits

• Certain disability support payments

Deductions That Can Lower Your Surplus

You’re allowed to deduct:

• Payroll taxes (CPP, EI, income tax)

• Childcare expenses

• Medical expenses not covered by insurance

• Court-ordered support payments

Your LIT will help determine exactly what qualifies.

How Surplus Income Affects the Length and Cost of Your Bankruptcy

Standard Bankruptcy: 9 Months

If you have no surplus income and this is your first bankruptcy, you’re typically eligible for discharge after 9 months. You’ll still need to make a minimum payment to the LIT for filing and administration costs.

Bankruptcy With Surplus Income: 21–36 Months

If you do have surplus income:

• A first bankruptcy extends to 21 months.

• A second bankruptcy extends to 36 months.

  
  

This means:

• Higher total payments

• More monthly reporting (proof of income/expenses)

• A longer time before your debts are officially discharged

Surplus Income vs Consumer Proposal: A Practical Comparison

Understanding the Difference

The difference between bankruptcy and consumer proposal often comes down to control, cost, and impact on your lifestyle. Surplus income plays a key role in that decision.

Why Some Choose Consumer Proposals

Many Canadians, especially those with stable or growing income choose consumer proposals to avoid the uncertainty of surplus income reviews. In a proposal:

• You know your payment amount from day one.

• Payments are based on your ability to pay, not a changing threshold.

• You don’t lose tax refunds, bonuses, or inheritance.

Real-Life Example: Maria’s Story

Maria, a 44-year-old warehouse worker and single mom in Vaughan, owed nearly $35,000 in unsecured debt. Bankruptcy would have cost her $500/month for 21 months, plus tax refunds.

Instead, her LIT suggested a consumer proposal:

• Offer: $18,000 over five years

• Monthly payment: $300 (fixed)

• She kept her tax refunds and didn’t have to submit monthly reports.

The result? Peace of mind, manageable payments, and financial breathing room.

What If Your Income Changes During Bankruptcy?

Bankruptcy requires you to report income monthly. If you:

• Start working more hours

• Lose your job

• Go on maternity leave

• Pick up seasonal or freelance work

… your surplus income will be recalculated.

This can increase or decrease your payments and affect how long your bankruptcy lasts. If your income increases significantly, your LIT may even suggest converting your bankruptcy into a consumer proposal.

Final Thoughts: Why Guidance from a Licensed Insolvency Trustee Matters

The LIT’s Role in Ensuring Fairness

Only a Licensed Insolvency Trustee is authorized to calculate surplus income and administer bankruptcy. Their role is to balance your right to a fresh start with creditors’ rights to a fair share.

Working with an LIT Gives You Options

A LIT won’t “push” bankruptcy or a consumer proposal. By law, they must explain all your legal options, show you how surplus income applies, and guide you toward the best choice for your situation.

The Bottom Line

Surplus income isn’t a penalty, it’s a fairness rule. But it does affect the cost, length, and emotional stress of bankruptcy.

If you’re earning above the OSB surplus income threshold, a consumer proposal may offer more stability and less long-term impact on your credit.

Ready to Explore Your Options?

Book a free consultation with a Licensed Insolvency Trustee at Litvack Group today. We’ll help you understand where you stand and how to move forward.