Understanding the Bankruptcy Mediation Process
One of the options for obtaining relief from your debts is to file for Bankruptcy protection. This can sometimes be the most practical option when a consolidation loan or a Consumer Proposal just does not fit your circumstances.
When you file an assignment into Bankruptcy you are required to report your household income over the period of Bankruptcy. Sometimes, that results in a requirement to pay in surplus income. If you cannot pay what is required on time there is a process of mediation. In this blog, we will help you understand the Bankruptcy mediation process.
A Journey Starts With the First Step
Once you decide to get a financial fresh start and contact a Licensed Insolvency Trustee (LIT), you have taken the first step towards a new financial you. We will explain your options and answer your questions. If you choose the Bankruptcy option you will get immediate financial relief.
A powerful stay of proceedings comes into effect and you do not have to pay your unsecured creditors. Those debts will become frozen including income tax debt!
The next goal is to obtain a discharge which will legally extinguish most types of debt. In order to get that discharge, you are required to do certain duties. One of those duties is to report your income. If your income rises, you may then have what Canadian insolvency law refers to as surplus income.
What is Surplus Income?
“Surplus Income” is the portion of your total income that exceeds that which is necessary for you to maintain a reasonable standard of living, in regards to the applicable standards set by the Office of the Superintendent of Bankruptcy Canada (Federal Government). Those monthly take-home pay standards change depending on the number in your household. For example, the 2021 standards are as follows:
- 1 person household $2,248.00
- 2 person $2,799.00
- 3 person $3,441.00
- 4 person $4,178.00
- 5 person $4,739.00
- 6 person $5,345.00
The definition of what is considered your net income is typically your revenue from whatever nature or from whatever source that you earned or received it, after taxes and statutory deductions.
The CCB (Child Care Benefit) is not considered income of the household, as it is for the benefit of the child.
Note that income will be averaged over the period of reporting – taking into consideration income fluctuations or if there is an increase or decrease of the number of persons in the household.
Four Different Timelines
There are several different timelines for reporting your income in the Bankruptcy process.
- First-time Bankruptcy – no surplus income. Every person filing Bankruptcy is required to report their income for an initial 9 month period. If you have no surplus income, and you have completed your other duties, no mediation is required and a Certificate of Discharge is issued.
- First-time Bankruptcy – with surplus income. If you experience what is referred to as “surplus income” then you are required to file an additional 12 months of Income and Expense Summary Reports to equal 21 months of reporting. The Government feels that if you are making more income than the allowable standard, as noted above, then it is reasonable for you to pay 50% of your surplus income requirements for the general benefit of the creditors. This will provide a dividend to your unsecured creditors. The other 50% of the surplus you are entitled to keep.
- Second-time Bankruptcy – no surplus income. The reporting period changes to a minimum of 24 months. If there is no surplus, and you have completed your other duties, no mediation is required and you will automatically receive your Certificate of Discharge.
- Second-time Bankruptcy – with surplus income. Perhaps you filed for Bankruptcy when you were in your early twenties. Now, several decades later, it looks like you will be filing for a second time. Filing for a second time requires you to file Income and Expense Summary reports for an initial 24 month period. If you experience “surplus income” then you are required to file an additional 12 months of reports to equal 36 months of reporting.
Calculating Average Surplus
The calculation of surplus income is done by averaging your monthly income over the period of Bankruptcy.
Once you have filed your last Income and Expense Summary Report with supporting income verification, the final summary of surplus income is calculated and reviewed with you.
What if You Were Unable to Pay in Your Surplus Income?
It is always a relief when you finish reporting your income and no longer have to file the monthly Income and Expense Summary reports. However, if you have a balance due on surplus income, you cannot receive your “Certificate of Discharge” until the balance due on surplus income is paid in full.
The Mediation Process
This is where Mediation comes in. It is available to those who have completed all their duties, however have a balance due at the end of their reporting period.
Essentially, it provides more time to pay into the Bankruptcy the required amount of surplus income. The mediation process was introduced several years ago in order to prevent matters from proceeding to Court.
Your Licensed Insolvency Trustee (LIT) arranges the Mediation agreement in the office and prepares the document for you to review, sign, and return. It is titled “Form 63 – Mediation Settlement Agreement.” This procedure is handled in the office to avoid Court time. In fact, it can usually be done via email, or via mail.
However, if you miss more than 3 monthly payments as defined under the agreement, the Mediation Settlement Agreement is considered to be in default and the Trustee will proceed to Court regarding an application for discharge.
The Mediation Settlement Agreement will also have a clause in it which allows you to prepay or pay the amount due in full at any time. Overall, the mediation process has been working well. Especially when a person needs just a little bit more time to finish paying,
Once you finish the Mediation Settlement Agreement payment terms you will receive your Certificate of Discharge.
Contact Us – We are Here to Help
Everyone’s situation is a little bit unique and there can be some important adjustments to the figures above. For example, support payments made or out-of-pocket medical can reduce the amount of surplus income.
Don’t be intimidated. Take advantage of our free initial assessment to ask us questions and get the information you need to make an informed decision. Reach out to one of our convenient locations to talk with a LIT today.