In today's post, we'll be focusing on surplus income and Directive 11R2. This policy holds significant relevance for consumer debtors as it directly impacts bankruptcy proceedings in Canada. Most crucially, it determines the amount a debtor will need to contribute to their bankruptcy. To phrase it differently, the creditors bear the brunt of the loss due to the bankruptcy, and the bankrupt party is also expected to tighten their financial belts if they have the capacity to do so.
First, let's unpack the term "Directive 11R2". Also known as the Surplus Income Directive, plays a pivotal role in Canadian bankruptcy proceedings. In the context of bankruptcy, 'surplus income' refers to the income that goes beyond what a bankrupt individual or family requires to maintain a reasonable standard of living, as defined by the Office of the Superintendent of Bankruptcy ("OSB") and found in s. 68 of the Bankruptcy and Insolvency Act. It is annually by the OSB updated to align with Statistics Canada’s Low Income Cutoffs (LICO).
If a debtor's income surpasses these thresholds, they are obliged to contribute a portion of it towards their debts during the term of their bankruptcy. While this term is limited to the initial 21 months for first-time bankrupts, or 36 months for second-time bankrupts, the court has the discretion to order that surplus income payments continue beyond the original bankruptcy term.
Directive 11R2 could substantially affect the bankruptcy timeline and the payments a bankrupt is mandated to make. Its application also determines how much a bankrupt have to contribute surplus income towards their estate and for how long.
But what if you dispute the Trustee’s Calculations?
Sometimes, a bankrupt individual and the Trustee may disagree on the calculation of surplus income. In my view, these disputes generally fall into two categories: 1) disputes regarding the accuracy of the surplus income calculations; or 2) inability or refusal to pay.
To address disputes related to surplus income, a few steps can be taken:
If the bankrupt party disputes the Trustee’s calculation and surplus income is the only unresolved issue obligation, the Trustee and the bankrupt may decide to engage in mediation to resolve the issue;
Alternatively, both parties can take the matter to court. The bankrupt party may present an alternative calculation to the court at the discharge hearing – this should be substantiated by their calculation with affidavit evidence. While the court will give consideration to the Trustee's calculation (see (Re) Cornell, 2021 ONSC 7427 at para 28), it reserves the right to review the calculations at the hearing.
If the bankrupt agrees that the surplus income calculation is accurate but simply cannot or refuses to pay, they may request the court to review their circumstances when deciding on terms of discharge, or request that the Trustee to consider the bankrupt's "personal and familial situation". The bankrupt party may request the court to take into account their unique circumstances and plead for a reduction or waiver of surplus income due to inability to pay or financial hardship. Considering the broad discretion exercised by a Registrar in Bankruptcy at a discharge hearing, this could be a possible recourse. It is also possible the Registrar in bankruptcy will not reduce the surplus income obligations and uphold the Trustee's calculations.
The Bottom Line:
Bankruptcy is a multifaceted process with several key components. Understanding significant pieces of legislation, government directives such as Directive 11R2, and the discretion of the Trustee and Court can greatly influence how you navigate it. Hiring an experienced insolvency lawyer can assist with both letting the bankrupt know where they stand and representing them at the discharge hearing to seek a reduction if the circumstances warrant it - or if a dispute with the Trustee arises.
