This week we are reviewing the new bankruptcy rules in Canada. We’ve talked about the rules that are good news for debtors: a consumer proposal may be a good solution to debt problems, and they are now easier to file. Yesterday the good news was that it is now easier to keep your car if you go bankrupt in Canada. Unfortunately there are other changes that are bad news for debtors in Canada:
Today’s Tip: The cost of bankruptcy just got more expensive, so be sure you understand the rules before you file bankruptcy.
If you file bankruptcy in Canada, your bankruptcy trustee is required to monitor your income each month. You are required, at the end of each month, to submit copies of your pay stubs and proof of other income to your trustee. If your income is more than $200 above the limit set by the government, your bankruptcy is automatically extended for one year, and you are required to make payments into your bankruptcy for an additional year. Clearly, if you have surplus income, your bankruptcy just got much more expensive.
Here’s an example: A single person is permitted to earn $1,870 per month in 2009. If they have take home pay of $500 per week, their income is $2,000 in a normal month. That means they have $2,000 - $1,870 or $130 in surplus income. Since $130 is less than $200, their income is not large enough to require the bankruptcy period to be extended. However, four times per year the person will receive FIVE paycheques, so in those months their income is $2,500, which is $630 over the limit. If during the first six months of the bankruptcy the person has two, five paycheque months, their surplus income would be: $630 in the two five paycheque months, plus $130 in four months, for a total of $1,780, or an average over the six months of almost $300 per month.
Here’s the catch: because the average surplus income is $300 per month, which is higher than the maximum allowed of $200 per month, this person’s bankruptcy would be automatically extended for an additional 12 months, and they would be required to pay that the surplus income penalty of half of $300, or $150 per month for 21 months. Under the old rules this person’s bankruptcy would most likely have ended in nine months.
That’s the impact of the new bankruptcy rules: the cost of the bankruptcy is much higher, and the bankruptcy will last for 21 months instead of 9 months. (If this was a second bankruptcy it would last for 36 months)!
If you are considering bankruptcy, it is essential that you ask your bankruptcy trustee to calculate your expected surplus income each month, so that you can determine whether or not your bankruptcy will last for 9 months or longer. Your trustee can no longer just look at a “typical” month to make this decision. They must look at the calendar to determine when you have an “extra” paycheque month, and calculate accordingly. Of course your trustee can’t do an exact estimate, because if your paycheques fluctuate, so will your surplus income.
Be prepared: book a no charge consultation with a bankruptcy trustee, and ask them to calculate the expected cost of a bankruptcy before you decide to file.
