Surplus Income Part I – History
What is surplus income, how does it work, what is the history of it as well as the pros and cons in bankruptcy scenarios
When I first started my insolvency career, I worked for a non-profit Credit Counselling Agency. Having had little experience with debt, the whole concept was very new to me. My induction training consisted of sitting through two sessions with the agency’s Executive Director then I was all set – as he said, “there you go, it isn’t rocket science”
Credit Counselling Agencies receive the majority of their funding from creditors, particularly banks. They are licensed as Collection Agencies and collect a commission from the companies they collect for. All of which is contrary to their stated mandates, to help consumers.
From a credit counselling perspective surplus income is any income that is left after meeting your basic needs. They work through a budget with their clients suggesting that you stop eating out, have no entertainment, do not drink any alcohol, quit smoking, walk more than you drive, etc., in order to free up “surplus” money that can be used to repay your creditors – basically along the lines of the TV show “Til Debt us do Part”
The Superintendent of Bankruptcy has changed its stance on what constitutes surplus income several times over the past few decades. The common thread has always been the Federal Government’s Low Income Cut Off, (“LICO”). The LICO developed from the original “Basket of Goods” started back in 1953 (or thereabouts) and was based on a basket of goods, that until recently included material for making clothes at home.
In the 1950s life was very different than it is today, while most homes had a radio, few had TVs, there was no internet, telephone lines were shared, meals were all home made, bread was baked from flour, many family even ground their own wheat, clothing was also made at home. Each year since the first LICO was released it has been upgraded based on artificial economic measures such as the Consumer Price Index.
To say that the LICO is out of touch would be a gross understatement. However, it has been only somewhat viable measure of poverty in Canada, until the current government redefined poverty as being less than half of the median income – which had the effect of raising people out of poverty by lowering the poverty line.
At one point the Superintendent gave complete discretion to Trustees to determine surplus income with reference to the “Guidelines” provided by the LICO. The Trustee could recommend that the bankrupt individual make payments throughout the basic administration period of the bankruptcy and for a term of up to twelve further months at the court’s discretion.
Later, the Superintendent changed the “Guidelines” to “Standards” and directed that bankrupts who’s income exceeds the threshold value set out in the “Standards” be required to pay for the basic administrative period plus a further twelve months beyond that time, with further extensions of time being available at the court’s discretion.
See Part II of this blog for more details of the calculation and treatment of Surplus Income