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BANKRUPTCY & SURPLUS INCOME

September 5, 2017

Is a strict reliance on the LICO a fair and reasonable way to calculate surplus income?

In at least one discharge hearing, Plamondon, before the bankruptcy courts the Registrar felt that a strict adherence to the Superintendent’s Standards for calculating surplus income would be unfair.

The Registrar, in rendering his decision, observed:

“In my view, given that the Superintendent’s Standards are meant to be a guideline to assist trustees in their discretionary determination of surplus income which is defined in s. 68(2) as being a level of total income in excess of that required to maintain a reasonable standard of living, the use of a mathematical formula that essentially calculates surplus income as 50% of after-tax income in excess of the LICO is troubling. It begs the question, how can it be said that 50% of what any bankrupt earns in excess of the LICO (a measure of low income and financial struggle that many use as a de facto definition of poverty) is an amount in excess of what is required to maintain a reasonable standard of living? Since the fall of 2011 (after the 21-month point from the 2009 amendments), this Court has dealt with some very disturbing examples of the unfairness that a rigid application of the Superintendent’s Standards can have on a bankrupt. This case is an example, although by no means the worst example, that this Court has seen. Many unpaid surplus oppositions that have come before me since the fall of 2011 have been at levels which have caused significant financial difficulty to the bankrupt during the bankruptcy and are impossible of compliance.”

It is obviously easier for trustees to rely on a formula than it is to deal with constant variance in the calculation of surplus income.  However, the Bankruptcy & Insolvency Act requires that trustees calculate and recommend an amount of “surplus income” that ought to be payable by bankrupt’s by giving consideration to the bankrupt’s particular circumstances as well as the guidelines set out by the Office of the Superintendent of Bankruptcy in its Directives.

The process of administering a bankruptcy allows for several opportunities to redress the amounts calculated.  The trustee is required to monitor changes and fluctuations in the bankrupt’s income and if they are material make further adjustments or recommendations in respect of surplus income payments.

There are two distinct opportunities for the bankrupt, the trustee, the superintendent or a creditor, to review the amounts payable through a process called “mediation“.  If mediation is unable to resolve the issue it may be determined by attendance at bankruptcy court, as in the case cited above.  If you would like more information about surplus income and how it is calculated contact our office – if you are already bankrupt contact your trustee for more information.