How Severance Pay Might Affect Your Surplus Income

It’s possible that you may lose your job during bankruptcy and may become entitled to some form of severance pay. If you have been working for the company for many years, this amount can be substantial.

Since severance pay is a form of income, it can affect your bankruptcy payments and the calculation of surplus income. We explain how.

What is Surplus Income?

Surplus income is part of the cost of filing bankruptcy. It’s a payment you make based on the amount of money you earn during your bankruptcy. The more you earn, the more you are required, by law, to pay.

The calculation is based on:

• the total amount of income in the household
• minus allowable deductions including for example child support, medical expenses, and child care
• minus an amount (threshold) based on the number of people in your household.

Every person who files for bankruptcy is required to report and to prove their income and expenses for a specific number of months as determined by the length of your bankruptcy.  A first time bankrupt who will be bankrupt for 9 months must report their income for 7 months.

A person’s net income (after eligible deductions) is compared against the Office of the Superintendent of Bankruptcy’s (OSB) income threshold totals. You are required to pay half of that ‘surplus’ into your bankruptcy.

Severance Pay and Your Bankruptcy

Severance pay is considered income in a bankruptcy but how it is treated depends on the circumstances.

Severance pay is usually received as a lump sum and lump sum payments can trigger potential surplus income where none would have been payable before.  However severance from a lost job is a unique situation because it also affects the ‘waiting period’ for EI.  If your trustee receives proof of your waiting period your severance payment can be pro-rated over the waiting period reducing the ‘monthly’ income you report. Depending on the size of your severance payment this may be enough to lower your monthly income below the surplus income limit.

If you obtain a new job during the period we calculate surplus income, you will have to report both your severance pay and new wages as income.  This can again trigger a potential surplus income payment even though your wages themselves may not be high enough to do so.

If you are considering bankruptcy and have questions about a possible severance payout during that period, be sure to discuss this with an experienced bankruptcy trustee before you file.