Most families today have two income earners. When one spouse files for bankruptcy the question often asked is whether or not their significant other will have to report income to the trustee.
The simple answer is YES you must declare your spouses income in bankruptcy. The reason for that is because of the requirement under the bankruptcy law for the Trustee in Bankruptcy to make a determination of whether or not you will have to pay what is referred to as “Surplus Income”. While the bankrupt makes these payments, how much he or she pays does depend upon total family income and total family expenses.
Understanding Surplus Income
The best way to describe surplus income is to view it like a penalty. Essentially, the more money you make while going through the bankruptcy process in Ontario, the more money you must repay to your creditors.
During your bankruptcy, your Trustee must make a determination of the amount of surplus income payments you will be required to pay in order to be discharged from bankruptcy. These calculations are usually done after you have been bankrupt for seven months and are based on reporting your provide about your monthly family income.
Why Family Income?
The Superintendent of Bankruptcy has determined that you can keep a minimum amount of your income as you need this to live on. They have determined these limits based on the size of a bankrupt’s family because they know the more dependents you have, the more it will cost you to live. The larger the family, the higher the net monthly family income limit will be.
For this reason you need to report your spouse’s income each month to your trustee.
Paying Your Portion of Income
Just because you are reporting you spouse’s income however does not mean they are required to make any payments. The government uses family income to determine your surplus income but you pay ONLY your share of the surplus into the bankruptcy.
Here is an example to help make this clearer.
Let’s assume you make $2,775.50 and your spouse makes $1,189.50. There are just two of you so the government say your can earn up to $3,165 (2023 limits) before you have to pay surplus income. In your case your family income is $3,965 so you are over the limit by $800.
Your share of the family income is $2,775.50/$3,965 or 70%. You pay your share of the excess or 70% of $800 x 50% (the government says you can keep half of everything over the limit) so you pay $280.
So as you can see, while you are reporting your spouse’s income to determine surplus, you are only paying your share.
If your spouse’s income is significantly more than yours it can trigger a surplus income payment for you however that is because the government views living expenses on a family income basis.