What is the Cost of Bankruptcy?

The most commonly asked question of our trustees is what does is the bankruptcy cost for filing bankruptcy in Canada? The simple answer is that there are three parts to the overall bankruptcy cost that you should consider, and discuss with your trustee, before filing:

  1. Minimum contribution to cover administration costs
  2. Surplus income
  3. Assets you lose in a bankruptcy

Administrative Costs of Bankruptcy

Trustee fees, filing fees and counselling fees are all regulated by the federal government. These costs are normally paid out of the proceeds resulting from the sale of seized assets. But what if you do not have any assets, can you still go bankrupt? Yes, however the trustee will require you to pay a base contribution each month that you are bankrupt to cover these administrative costs of your bankruptcy. The average minimum contribution in Canada is usually in the range of $200 to $250 per month, but could be more or less, depending on your situation.

One other important piece of information you should be aware of is that you should never have to pay a referral fee to see a trustee. Most accredited trustees in Canada, and all of those associated with MoneyProblems.ca, offer a free, no obligation initial consultation. If you are in serious financial trouble contact a licensed insolvency trustee to discuss your options before you decide what is the best solution for you.

Surplus Income Can Add To Bankruptcy Cost

The second cost of filing bankruptcy is what is known as surplus income. The concept behind surplus income is simple: the more you make, the more you pay. The requirement to pay surplus income is intended as a way for debtors who have the ability to do so to make reasonable payments to repay a portion of their debt.

Surplus income is determined by rules set out by the Superintendent of Bankruptcy. The amount of surplus income you will be required to pay will depend upon three factors:

  1. How much you earn
  2. Allowed deductions
  3. Your family size

Your monthly Surplus Income Payment is calculated using the following formula:

Net Income – threshold = Surplus x 50% = Payment

Your Net Income is based on the take home pay of everyone in your household less eligible deductions including support payments, child care payments, medical bills, fines and penalties, any other employment expense that you normally deduct when preparing your income taxes.

The threshold is set by the Office of the Superintendent of Bankruptcy and is meant to allow Canadians who need to go bankrupt to maintain a reasonable standard of living during the bankruptcy process. Currently, surplus income thresholds (updated for 2017) are as follows:

Family Size 1 2 3 4 5 6 7
Income threshold $2,121 $2,640 $3,246 $3,941 $4,470 $5,041 $5,612

An Example: Joe lives alone and has a take home pay of $2,721 per month. Using the above formula, Joe’s monthly Surplus Income Payment to the trustee would be:

$2,721 (net income) – $2,121 (threshold) = $600(surplus) x 50% = $300 (payment)

Surplus income payments can be confusing, particularly in circumstances where your monthly income may fluctuate. Your trustee can help you determine what your surplus income payment will be.

Surplus income may also affect how long your bankruptcy lasts. If you have surplus income of more than $200 per month, the period before automatic discharge for a first time bankrupt increases from 9 months to 21.

If you expect to have significant surplus income that will increase your cost of bankruptcy, it may be wise to instead consider a consumer proposal as an alternative.

Assets

The third significant cost of bankruptcy is that you lose your assets including, in some case, the equity in your house, your tax refund for the year of filing and all tax refunds for prior years that you have not received, contributions to an RRSP made in the 12 months prior to your bankruptcy and any other assets you own unless those assets qualify under the rules governing bankruptcy exemptions.

What do I do now?

Deciding if bankruptcy is the right option for you can be a complicated decision. It is strongly recommended that you arrange a free initial consultation with a licensed insolvency trustee who will be able to guide you to determine what your surplus income might be, how long your bankruptcy will last and if bankruptcy is the right option for you. We recommend that you ask a trustee to review your situation before making your decision final.

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