Surplus Income Part II – Application
Surplus income is calculated by the Trustee’s staff by comparing the proven income (from bankrupts’ paystubs or bank statements) to the “Standards”, see Part I. If the individual’s Discretionary Income exceeds the LICO, assigned to their family size, by $200 or more then they must pay half (50%) of that excess value to the Trustee
Income is divided into two categories for the purpose of these calculations, there is Non-Discretionary Income and Discretionary Income. These amounts are dictated by purpose, based on the usage of the funds, or Non-Discretionary Expenses versus Discretionary Expenses. The way these terms are used gets confusing, even for people who have an understanding of what they mean.
To be “Non-Discretionary” one must be used for a specific purpose, there is no choice without serious repercussions. Expenses that fall into this category include items such as child or spousal support, fines imposed by a court, medications or necessary medical expenses, employment related expenses (costs that must be paid to work, typically licensing, travel or other necessary expenses). Non-discretionary expenses are elevated to a special category and deducted from the bankrupt’s income before it is compared to the Standards to calculate surplus income.
Ironically what are categorized as “Discretionary” expenses often leave very little discretion – food for instance, prices have doubled in the past three years and if you want to eat you have little discretion, similarly, rents have escalated exponentially over the same time period and must be paid to have a place to live. But these expenses do not allow for any relief from the income being compared to the standards for surplus income calculations.
More examples can be found on the Superintendent’s website (linked above) but here is a simple scenario to help you understand how the calculations work. A single person earns $3,200 per month (after taxes) the Standard for a family of one is $2,543 on the face of it the bankrupt has $657 more than the Standard and would be required to pay half of that amount ($382.5) for that month as surplus income
However, the Trustee must calculate the average over a period of time (for a first time bankrupt seven months, for a second time twenty one months). As the bankrupt individual’s income rises and falls so does the average surplus payable. In other words, the bankrupt is not penalized for having one good month of income. A bankrupt is required to pay surplus income throughout the term of the administration (9 months for a first timer, or 24 months for a second or more) plus twelve additional months
Options for Reduction.
There are basically two options for the bankrupt to have the amount of surplus payable reduced, the first is through a mediation process, and the second through a court hearing. If you are paying surplus income in your bankruptcy and struggling to maintain the payments, you should speak with your Trustee about these options.