IF I CAN’T AFFORD MY VEHICLE AND HOUSE PAYMENTS – WHY DO I HAVE TO MAKE SURPLUS INCOME PAYMENTS?
Have you done some research about bankruptcy which says that you have to make payments to the trustee for surplus income but you don’t have enough income to make your vehicle and house payments? It doesn’t make sense to you?
Here is an explanation of how surplus income is supposed to operate;
The goals of the bankruptcy process are
- give the debtor a fresh start, and
- provide to the creditors whatever assets are available.
The debtor is allowed to keep certain property as described by law to reasonably maintain their livelihood, residence interest and household goods and cover living expenses from income while bankrupt. The surplus assets, if any, and surplus income, if any, goes to the trustee for creditors.
The bankruptcy law is designed to balance the interests of you and your creditors.
When it comes to income received while you are bankrupt, there is a formula used to describe surplus income. Essentially the formula uses three facts;
– your monthly income,
– the number of individuals in your household
– the monthly deductible amount for a household of your size set by the government.
The formula is designed to ensure a basic amount you are allowed to keep to maintain your household expenses with the balance paid towards creditors for a limited period of months.
Here is an example;
Joe is a tradesman who earns on average $4,000/month net.
Joe has a teenage son living with him who is a student so there are 2 in the household.
The monthly deductible for 2 people (for 2018) is $2,679/month.
The formula is; $4,000/month net income
-$2,679/month deductible for 2 people
$660.50 to be paid to the trustee for creditors.
As you can see, the surplus is calculated as $1,321 and ½ of the surplus which is $660.50 is to be paid to the trustee as surplus income (for a certain restricted period of time, usually a far lower amount than his total debt to unsecured creditors). So Joe is left with $4,000 – $660.50 = $3,339.50 to cover all monthly living expenses.
If Joe has to pay $2,000/month for a house mortgage, $800/month for vehicle payment that only leaves him $539.50/month for gas, vehicle & house insurance, food, clothes, utilities and all other expenses of a household. $539.50 is not enough. Somehow Joe has to cut back his expenses to balance his budget.
The reality is Joe can’t afford to keep both his house and his vehicle. The creditors who hold the mortgage and financing on his house and truck are secured creditors and secured creditors are not affected by Joe’s bankruptcy. Only his unsecured creditors get their claims against Joe discharged.
Unfortunately, Joe overcommitted his income towards secured debt and he will have to choose which of the house or truck he can afford to continue paying.