The federal government of Canada changed the rules to make bankruptcy more expensive for many Canadians in 2009. The government has adopted an income test to determine how much a person must pay while bankrupt, and to determine how long a personal bankruptcy in Canada will last.

Under the old rules, each bankrupt was required to prove their income to their trustee each month, generally by submitting copies of their pay stubs. If their income exceeded a set amount, the bankrupt was required to pay a penalty of half of the amount they were over the limit.

Those rules still exist, but with an added twist. If on average the bankrupt’s income is more than $200 over the limit each month, the bankruptcy period is extended by an extra year, and the bankrupt is required to make surplus income payments for an additional year.

in 2009 a single person with no dependents and no unusual expenses is permitted to earn $1,870 per month, after taxes. If they earn $2,470 per month, they are $600 over the limit, so they are required to pay a surplus income penalty of $300 per month. Even worse, because their surplus income is over $200 per month, their bankruptcy will last for 21 months, as compared to a bankruptcy with no surplus income that can end in 9 months. They are required to pay the $300 penalty for 21 months, so obviously the cost of the bankruptcy is double what it was under the old rules.

The above example applies in the case of a first bankruptcy. In a second bankruptcy the bankruptcy period is automatically extended to 36 months.

It is critical that a knowledgeable bankruptcy trustee is consulted before bankruptcy is filed, to do a detailed estimate of potential surplus income. Here’s why:

A quick review may indicate that the bankrupt is expected to earn $1,000 every two weeks, or $2,000 in a typical month. Since $2,000 is only $130 above the limit of $1,870, it would appear that this person can expect to be discharged from bankruptcy in nine months. However, that may not be the case.

Twice each year a person who is paid bi-weekly will receive three pays. In those months their income is $3,000, or $1,130 over the limit. If they have two of those three-pay months during the bankruptcy, their average surplus income will be higher than $200 per month, and their bankruptcy will be extended for an extra twelve months. Obviously expert advice is required to accurately estimate the payments required in a bankruptcy in Canada, and that advice should be obtained before you decide to go bankrupt.

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