A financial windfall is any unexpected amount of money you receive. Whether it be from a lottery win or an inheritance – it’s the things we dream about. But what happens when you receive an unexpected windfall when you have filed for Bankruptcy?
Today’s podcast features Daniel Masymchak, Licensed Insolvency Trustee answering questions about windfalls and surplus income while in Bankruptcy.
- What happens to windfall money when you are in Bankruptcy and then when you have been discharged?
- What is surplus income and how is it calculated?
- How does Bankruptcy affect your credit score?
- Who goes bankrupt and why?
- How long does Bankruptcy last?
Choosing a debt advisor is an important step in your debt recovery. Licensed Insolvency Trustees provide guidance on how to resolve your debts. They are the only federally regulated debt advisors in Canada.
Read the Transcript
Wayne Kay 00:04
Welcome to the Debt Matters podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay.
Today we’re going to talk about what it actually looks like when you are in Bankruptcy. What happens to your income when you’re in Bankruptcy? Does your income impact the payments that you’re making during Bankruptcy?
And what happens if you have some kind of a windfall? Do you get to keep that surplus money that comes into your life?
My guest today, Daniel Maksymchak from LCTaylor Licensed Insolvency Trustee with offices in Winnipeg and Kenora. Daniel, thanks for being here.
Daniel Maksymchak 00:45
Good morning, Wayne. How are you?
Wayne Kay 00:47
Good, how are you doing?
Daniel Maksymchak 00:49
I’m good, thanks.
Wayne Kay 00:50
Good. How are Bankruptcies these days? Are we seeing Canadians filing more or are we still kind of even and just waiting for things to go sideways in the next couple of years?
Daniel Maksymchak 01:01
Yes, it’s definitely started to tick back up since the lows of the pandemic. I think it was fairly well publicized that during the depths of the pandemic, filings were at relatively historic lows.
So it’s definitely creeping up from that level. We’ll see how things go in the next few months, I suppose.
Wayne Kay 01:20
I bring that up because this is what the show is about. If people are having financial hardships, you’re here to offer some advice for them. And that’s what we do.
We help Canadians with all these things that happen in life that you really can’t help for the most part. A Lot of times you’re seeing that with the Bankruptcies – these are the fault of somebody. There’s just some situation that happens that really knocks them off their feet and then there’s a problem.
So today we’re actually going to talk about people who are actually in Bankruptcy and what they can do regarding their income, how much they can make.
What if all of a sudden they make more? Or let’s say, what if a windfall comes? That’s what the topic is all about today. And that does happen. You do see that?
Daniel Maksymchak 02:04
It does, yes. People’s income can vary greatly, for better or for worse. And it definitely has an impact on Bankruptcies, for sure. Even for someone not in Bankruptcy. It can be the difference between being able to get by with their bills or if something negative happens with respect to their income. A lot of times these days, people are kind of so close to the edge that any slight decrease in income can be very problematic.
Wayne Kay 02:31
I was watching when they increased the interest rates for homeowners that there was somebody in, maybe it was in Toronto or somewhere, single lady, and just because she was on a variable mortgage, her mortgage went up $600 a month, which, as you mentioned, everybody is so tight right now financially. Paycheque to paycheque – $600 can be a major hit.
Daniel Maksymchak 02:58
It can be. It kind of just comes up one month you’re paying $600 less next month you’re paying $600 more. You have to find money in your budget.
Presumably that’s going to come out of – in some cases if people are fortunate it might mean a reduction in retirement savings or savings for something else, discretionary spending. But in a lot of cases it’s going to come from essentials. Things that are budgeted because they’re needed, not because they’re wanted, so to speak.
Wayne Kay 03:27
So let’s dive into the world of Bankruptcy. When somebody is declared bankrupt and you start the process. What happens to all of their payments or their income from day one of the Bankruptcy?
Daniel Maksymchak 03:45
When someone files for Bankruptcy there’s really no change to their income. So presumably they’re still going to work, they’re still earning the same amount of money they were before. That will continue, they will continue to receive their tax. There’s no interference from the Trustee or the Bankruptcy process with respect to intercepting that income or anything like that.
Sometimes when people come in for their free consultation they ask – does the income get paid to the Trustee? That question sometimes catches me off guard. But I’m not sure where that myth comes from because people continue to receive their income. Now they do have to report that income into the Bankruptcy because sometimes your payments into the Bankruptcy can depend on how much you make. But there’s no interception by the Trustee of the income between the employer or whatever income source it is and the Bankruptcy.
Wayne Kay 04:36
So all of a sudden they wake up, the Bankruptcy begins, the debt is gone and all of a sudden the money’s back in their pockets basically. So their concern is that I think they’re wondering if you get it first or the Licensed Insolvency Trustee gets it first and then you do something with it – where you only give them a limited amount. Is that where the concern is?
Daniel Maksymchak 05:07
Some people think that the money comes to the Trustee and then the Trustee gives the debtor an allowance or something like that. Sometimes Insolvency Trustees are unfortunately confused with the Public Trustee which is something totally different – where basically the government or an agent of the government looks after somebody’s finances who are judged to need that assistance. But a Bankruptcy Trustee is nothing like that. The bankrupt person continues to receive their income as per usual.
Now their income may affect how much the person has to pay into the Bankruptcy. There’s a whole regime of surplus income set by the federal government in the insolvency laws – where if you’re deemed to be making sufficient income to be able to afford a payment into the Bankruptcy, which at the end of the day flows through to the creditors, typically then you’re required to do so. But as I said, that’s a reported figure from the bankrupt and a payment made by the bankrupt from the Trustee. There’s no interception by theTtrustee of the income for that, typically.
Wayne Kay 06:11
Okay, I know this is going to be a difficult question. Can you give me an example with numbers?
So let’s say somebody’s making $5,000 a month of income. How does that work if their living costs them $5,000, or if they’re living costs them $3,000, there’s $2,000 surplus income. What happens to that $2,000? Do they get to put that in the bank?
Daniel Maksymchak 06:37
No, they wouldn’t. So in this scenario, if we go on your example where someone’s making $5,000 and we’ll call that net income – what they’re taking home each month. The first question for that $5,000 is how many people are in your household?
If it’s a one person household and that one person is making $5,000, then the Bankruptcy law dictates that that person or her household of one can keep the first $2,355 a month net. So in this example, if it’s $5,000, they’re over that by about $2,650. They would have to pay 50% of that overage into the Bankruptcy each month. So $1,325, I guess, would be their surplus income payment into the Bankruptcy.
The amount that they spend on their living costs is largely irrelevant in this discussion because the government sets a number that they think is reasonable for someone to live on, and the surplus income is paid based on that number. Now, that number is set nationally. That’s caused some issues in recent years as the disparity between different regions and the cost of living have increased in that disparity. But at this point in time, it’s a flat number and you pay based on that number as opposed to your own circumstances.
Now there are some, there’s always a proviso to that. If you have medical expenses, if you’re paying child support or spousal support or you pay child care or something like that, that’s deducted from your income. But as a broad example, it would work as I outlined there.
Wayne Kay 08:14
This is the 68th show that we’ve done with Debt Matters. First time we’ve actually really dove into what the numbers look like when it comes to Bankruptcy. So I’m glad we’re discussing this because I didn’t realize that’s what the numbers actually look like.
So all of a sudden you’re going along and they break it down exactly like you just said. But all of a sudden comes a windfall. And I mean, you’ve been praying for a windfall to try to not go into bankruptcy – to try to solve all this stuff, and all of a sudden grandma ends up passing away and you get some money. What happens to that money? Do you get to keep that windfall?
Daniel Maksymchak 08:52
So if you’re in Bankruptcy, you’re still in the period where you haven’t been discharged from the Bankruptcy yet, and money becomes due to you from something like that, say an inheritance, then that asset essentially becomes a property of the Bankruptcy estate. So that inheritance that you receive goes to the Bankruptcy estate. It’s paid into the estate and you would only see money from that if the creditors were paid in full as per the Bankruptcy Insolvency Act.
If there were any surplus funds, then typically that’s returned to the debtor. The theory there is, as you said, when you have the debt and you’re facing challenges and you’re basically praying for any kind of money to come your way to save the day, if that had happened and you received the money, presumably you would have used that money to pay the debt.
So this effectively does the same thing. You’re in Bankruptcy, the money comes into the Bankruptcy, it pays the debts, and then if there’s any above and beyond that, then that’s when the debtor would see the money.
Wayne Kay 09:53
Okay. Obviously they are watching all bank accounts. Is that how that works? Are you following along with all the income? Does it automatically have to be reported truthfully? How does that work?
Daniel Maksymchak 10:08
No, typically the bank accounts aren’t monitored, but the debtor does have a responsibility under federal legislation to disclose anything like that to the Trustee. So that would get disclosed to the Trustee. The Trustee would then explain how things would work with respect to the windfall, to the debtor, and the Trustee would expect, of course, that legislation to be followed. If it wasn’t, that would be a problem.
But typically the debtor understands the situation – sometimes happy that the debts get to be paid off. And it doesn’t happen too often, to be honest, with these windfalls in terms of inheritances or something like that come in. But when it does happen, the legislation clearly dictates what happens in those situations.
Wayne Kay 10:56
Does it look different when it comes to a Consumer Proposal?
Daniel Maksymchak 11:01
It can, yes. Because then you’re going to be bound by what the terms of the Consumer Proposal states. So if you’re in a Consumer Proposal, you’ve hashed out the agreement with your creditors, what you’re going to pay, over what period of time. That’s the deal.
Typically any money that comes to you after the deal has been hashed out, whether you get a raise at work, you get more hours, you get a better paying job, or if it’s kind of a windfall that comes your way – unless the proposal dictates that any windfall has to be paid to the creditors, that’s usually the property of the debtors to keep.
Some creditors may require in the proposal that there’d be a clause that if a windfall is received by the debtor while the proposal is ongoing, it has to be added to the payments or something like that. But I would say that that’s an exception more than a rule.
Wayne Kay 11:47
And you were talking about if this happens before you release from the Bankruptcy. Can you explain exactly what that means from when the Bankruptcy is filed to release date? What does that look like?
Daniel Maksymchak 11:59
Once you assign yourself into Bankruptcy, then you’re what’s known as an undischarged bankrupt. You’ve started the process, but you haven’t yet fulfilled all of the requirements of the Bankruptcy to receive your discharge.
And while you’re in that state of being an undischarged bankrupt, that’s where the Trustee is essentially finding your assets for the most assets that are subject to the Bankruptcy. That would include any kind of windfall that would come during that period.
The length of time that you’re in Bankruptcy for depends on a few things. How much money you’re earning, whether it’s your first Bankruptcy or if it’s a second or subsequent Bankruptcy, and whether or not you fulfill the conditions, the requirements of the Bankruptcy process to get your discharge in a timely manner once you become eligible for it.
Wayne Kay 12:45
How long does that typically take?
Daniel Maksymchak 12:47
Well, it depends. A first time bankrupt with minimal income below that $2,355 number that we mentioned earlier would be eligible for the automatic discharge after nine months. If their income is beyond that number to the point where they’re paying surplus into the Bankruptcy, then they wouldn’t be eligible for their automatic discharge from the first Bankruptcy until 21 months passed for a second Bankruptcy.
Those numbers shift to 24 months without surplus and 36 months with surplus. That means that when you become eligible for the automatic discharge, it doesn’t mean that you’re necessarily going to get it. In most cases, of course, people follow through on the process. They do everything that’s required of them and they get that discharge automatically. But if there’s something outstanding or deficient in the Bankruptcy, then that delays the discharge process and they would be in Bankruptcy for longer.
Wayne Kay 13:39
There’s this seven year thing that I hear when it comes to Bankruptcies. Is that something old, some kind of a myth that if you go into Bankruptcy, then basically you can’t do anything for six or seven years.
Daniel Maksymchak 13:55
That is referring to the length of time that the Bankruptcy stays on your credit report. It’s not the length of time that you’re actually in the Bankruptcy, but once you get discharged from the Bankruptcy, it stays on your credit report- that you did that Bankruptcy for much longer than you’re actually in the Bankruptcy for, typically.
Wayne Kay 14:14
Okay, but by that point, because part of going through a Consumer Proposal or a Bankruptcy or dealing with a Licensed Insolvency Trustee – comes credit counseling. So that looks like what?
Daniel Maksymchak 14:29
Anyone who files a Bankruptcy or a Consumer Proposal in Canada is required to attend two financial counseling sessions, credit counseling sessions. The government sets a curriculum for that and covers the top and basically outlines the topics that are to be covered in those counseling sessions. The idea of the Bankruptcy and Insolvency Act, which lays out the Bankruptcies and the Consumer Proposals, is to rehabilitate people, so to speak, so that they can carry on with financial strength for the rest of their life. After the Bankruptcy or the Consumer Proposal has finished so that they can move on and hopefully never be subject to that again. So part of that rehabilitation process is the counseling.
It’s how the curriculum lays out suggestions to discuss budgeting, money management, financial assistance, the options that are out there, as well as how to rebuild your credit post filing so that you can carry on as a normal consumer member of society following the file.
Wayne Kay 15:32
Okay, so that is required. And I think it’s a good thing because so many of us don’t learn this. We don’t learn it. It’s not passed on from our parents, we don’t learn it from school.
It’s no wonder we get into financial trouble like we do because everybody makes it so easy. Every time you go to a store they would say, well, get our credit card, we’ll give you 20% off. You can see how it happens.
Daniel Maksymchak 16:01
Yes, I agree with that. There’s not much of these topics covered in school or instruction that people receive in this regard. A lot of people who are in the situation of a Bankruptcy or proposal, often through bad circumstances as opposed to crazy spending or extravagant living or anything like that. So obviously there’s nothing credit counseling can do to tell you to not get sick and have to go off work or something like that.
Some of those things are unavoidable, but in the circumstances where it is brought about by mismanagement or overextending your situation with regards to taking on too much credit, then it can certainly be useful in those circumstances.
Wayne Kay 16:44
I’m glad you pointed that out. That’s an important piece. And through all the shows that we have done, we have talked about that a lot of times. You’ve seen it, that it is of no fault of their own. It’s just something happens where they just can’t work due to an illness and what are you going to do? It’s just a bad situation.
Daniel Maksymchak 17:01
Yes, exactly right. We have people who come in that I’ve done the credit counseling for who, you know, they’re better budgeters than me. They manage their money better than 95% of society, but they’ve had something come up that just totally derailed them. It couldn’t have been expected. It just wiped them out essentially.
And here they are having to pick up the pieces and restart. And that’s why the Bankruptcy Insolvency Act exists, so that people can file a Bankruptcy or a Consumer Proposal and not be burdened by that unfortunate happenstance for the rest of their life.
Wayne Kay 17:36
And we always tell people it’s a free consultation, reach out sooner rather than later. That’s the most important thing people can do when it comes to getting some financial help.
Daniel Maksymchak 17:47
Yes, I certainly agree with that. The sooner that you talk to someone, the sooner you’re going to receive information on what your options are at that point. There’s going to be the most options available to you.
If you go further down the line, sometimes things get so dire that there’s no option, really besides a Bankruptcy or Consumer Proposal. So the sooner that you talk to someone, find out what your options are, the better possibility there is of you avoiding a Bankruptcy or Consumer Proposal and recovering on your own without going through one of those steps.
Wayne Kay 18:22
Right. And it does happen all the time. So, Daniel, thank you very much. This has been a great discussion.
Daniel Maksymchak 18:28
Yes. Enjoyed it. Thank you, Wayne.
Wayne Kay 18:29
You got it. We’ll have you back on the show again in the very near future.
Daniel Maksymchak 18:35
Okay, thank you.
Wayne Kay 18:36
I guess today, Daniel Maksymchak, and you can learn more or schedule that free consultation that we were talking about with LCTaylor Licensed Insolvency Trustee. Just go to the website lctaylor.com.
And that is it for another edition of the Debt Matters podcast. Just make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out our website, debtmatters.ca. Thanks for listening.
About Daniel Maksymchak
Daniel has worked in the bankruptcy and insolvency field since 2010. His career began in accounting, receiving his Chartered Accountant designation in 2009. He attained his Licensed Insolvency Trustee accreditation in 2014.
Daniel is a member of the Canadian Association of Insolvency and Restructuring Professional (CAIRP) and has volunteered his time with numerous causes in the community.