Part 2 Surplus Income in Bankruptcy

Welfare Claw backs and other Nasty Things Part 2 – Surplus Income in Bankruptcy

A similar problem has happened with the Surplus Income rules in a consumer bankruptcy.

Bankruptcy is another social safety net in Canada. It’s a place for people who can’t afford to pay back or meet their creditor obligations. There are many factors that may contribute to this insolvent state of affairs. Unrealistic Lifestyle – Gambling – Job loss – Illness – Injury – Marital breakdown –etc.

Bankruptcy law evolved out of the Middle Ages as an alternative to debtor’s prisons, basically to wind up failed companies and distribute the proceeds from the sale of the company assets to the creditors. Today, consumer bankruptcies are a huge part of the Canadian bankruptcy process. A significant cause for individuals and families to go bankrupt is marital breakdown. In addition to all of the other factors that lead to a family’s disintegration, splitting the household in two results in a duplication of household expenditures, such as two rents. Family expenses go up for the separated. Paradoxically, the cost to separate frequently keeps unhappy and angry families together until a triggering event of such magnitude forces someone out of the house. On many occasions this follows a visit to a lawyer’s office and the payment of a $5,000 retainer on a visa or MasterCard.

Bankruptcy legislation has repeatedly been amended since 1992 to protect child support from creditors except for one – the Directive on Surplus Income.

What is Surplus Income in Bankruptcy? The surplus income standards allow an individual or family a certain amount of net income to live on before they must pay to the trustee for the benefit of their creditors. The amounts they are allowed and the amounts they must pay are listed below.          

Appendix A Superintendent’s Standards – 2014

The Superintendent’s Standards (“S”) are derived from the Low Income Cutoffs (LICO) released by Statistics Canada. The Superintendent uses the before-tax LICO for urban areas with 500,000 people and over. The 2014 standards are updated by adding to the 2012 LICO, the 2013 Consumer Price Index (CPI) (0.90%) plus a 1.3% adjustment reflecting the 2014 CPI expectation

For example, where the bankrupt has monthly surplus income equal to or greater than $200, the bankrupt would be required to pay 50 percent of the monthly surplus income to the bankrupt’s estate until discharged from the bankruptcy. For a first-time bankrupt, this could be a 9 month period or, if the bankrupt still has surplus income available at the 9^th month, they would be required to continue to pay for an additional 12 months before being eligible for an automatic discharge.

Child Support and Bankruptcy

Child support received by the bankrupt in a consumer bankruptcy is lumped together under total income of the bankrupt family. And, similar to the welfare clawback of child support, the intention of federal and provincial legislation for child support to be paid to the recipient for the benefit of the child, is unfairly overridden or more accurately clawed back – for the benefit of commercial creditors.

This raises the obvious question, why would government give with one hand and taketh away from the other? Why would they take away child support for children and giveth to commercial creditors?

These are serious questions that rarely get asked and never get public exposure. Similar to welfare recipients, there appears to be a presumption by bankruptcy officials and the credit community that bankrupts and their children have lesser rights and needs than others.

Of course this line of thinking dates back to archaic attitudes by earlier lenders who opposed the fresh start principle of bankruptcy for anyone – including honest but otherwise over indebted consumers. Certainly, it does not represent the guarantee of fairness and neutrality expected from the judicial system – family court, bankruptcy court, provincial and federal legislation.

The Credit Society

The other unmentioned aspect of modern day bankruptcy is the credit society in which an entire nation of individuals and families today owe $530 billion in consumer debt (excluding mortgages.) Our attitudes, values, and principles regarding money management have evolved and changed dramatically from the cash and carry economy of the 1950s and 60s and before.

We owe more than any other time in history. A staggering amount of credit has been extended to people by a wide range of lenders. It is not possible to have debt problems or bankruptcies without creditors. They are a significant factor and play a prominent role in creating a long list of casualties by lending too much, constantly advertising and encouraging people to use credit, to live a lifetime in debt and to lose their fear of debt.

This is the credit society in which we all live today, where merchants, governments, individuals and families are all dependent upon the credit system. Credit is more than just debt too. It’s a symbol of the computer age of electronic transfers, automated banking, on-line shopping, debit and credit cards. This is the new market place.

Even though consumer bankruptcies have risen to over 100,000 in Canada per year, the effect on lending, the credit system and the economy is negligible. Bankruptcy further provides a service to governments and creditors, not just the bankrupt debtor. It allows the creditor to close their file, cease spending money on collection activities that have no hope of recovery. It winds up the family estate or bankrupt company by seizing exigible assets for the benefit of creditors and discharges the debt problem for both debtor and creditor. It also provides relief to debtors from creditor pressure and aggressive collection practices.

Bankruptcy gives honest bankrupt consumers a second chance by discharging past debts, to learn from their mistakes and resume a productive life. Finally, dishonest consumers or those who abuse the credit system are held accountable through the offence and discharge sections of the Bankruptcy and Insolvency Act. Mandatory counselling provisions aim to rehabilitate bankrupts.

A Real-life Story

One of my cases from the Debtor Assistance Program documents the unjust nature of the conflict in bankruptcy between child support and the surplus income rules. A 30 year old single mother of two young children, both under 5 years of age, came to see me in the late 1990s. Her estranged husband had quit his job as a means to avoid paying any child support and not co-operate in any way with the co-signed family creditors.

She was struggling with creditor pressure, the threat of wage garnishment and finding it difficult to make ends meet. After several attempts to encourage the ex-husband to co-operate, we referred her to bankruptcy to find relief from her impossible debt problem. She eventually obtained a provincial court order to pay child support under the Child Support guidelines.

She had enrolled the court order in the Family Maintenance Enforcement Program. Approximately $30,000 in child support arrears were owed before she filed her assignment into bankruptcy. At this time the ex-husband had never paid any child support whatsoever. It’s important to note that the ex-husband was a gifted technician in the computer industry and worked under the table for cash.

6 months after her assignment into bankruptcy the FMEP found a $6,000 pension fund for the ex-husband and promptly garnisheed it for the full amount. The trustee then promptly claimed the full amount of the $6,000 as surplus income – income for the month over and above the guideline amount for bankrupts. This raised many issues. First, the child support arrears were outstanding before the date of bankruptcy and were arrears not income that was earned for a particular month. Secondly the monies were owed for the benefit of the children by a court order. Thirdly, the mother and children suffered for no less than two years without any financial support from the ex-husband.

The trustee in bankruptcy was not doing anything wrong either. It was his duty under the surplus income rules to seize the child support arrears. This is merely one solid argument for the Office of the Superintendent in Bankruptcy to now amend the Bankruptcy and Insolvency Act, by following the Province of BC’s elimination of the Welfare clawbacks and exempt court-ordered child support from the Surplus Income rules.