Declaring bankruptcy certainly isn’t the end of the world, but it does have significant repercussions that will have an effect on your finances in the future. I’ve discovered that in many cases, focusing efforts on building a bright future is the best way for people to tackle their bankruptcy and subsequent recovery. To do this, however, people have to appreciate exactly what bankruptcy entails so they can effectively budget, plan, and rebuild their wealth in the most functional way possible.

 

One of the most concerning questions I get asked is related to how bankruptcy will impact child support payments. Whilst this topic may appear to be pretty straightforward, I’ve found that it causes a lot of misunderstanding so today we’re going to take a closer look and attempt to clear up some of that confusion.

 

Does bankruptcy cover child support debts?

While bankruptcy releases you from a variety of debts, child support is not one of them. If you owe a considerable amount of money in child support when you declare bankruptcy, it will not be released in bankruptcy so it’s best to speak with the Department of Human Services (DHS) and discuss a repayment plan. If, for whatever reason, you feel the assessment provided by the DHS is incorrect, you can contest this.

 

How is child support figured out?

The DHS is accountable for overseeing and working with separated parents on child support assessments. To calculate how much child support you must pay, the DHS examine both your income and your care percentage of the children involved. By using your previous tax return as a measure, the DHS will use these numbers to determine your anticipated income for the upcoming year. This highlights the value of keeping your tax returns up to date, and any adjustments to your circumstances should be relayed to the DHS immediately.

 

Income contributions to your bankrupt estate

An income threshold is utilised to determine if a bankrupt person can afford to contribute some of their income to settle the debts in their bankrupt estate. Despite this, issues like income tax, the number of dependents, fringe benefits, salary sacrificing, and child support will alter your income threshold. The following table displays the relevant threshold limits as of September 2017:

 

The DHS define a dependent as somebody who lives with you most of the time and earns less than $3,539 every year.

 

Assuming you earn over the income threshold, your trustee would figure out your income contributions to your bankruptcy estate with the following formula:.

 

(assessable income – income threshold amount) ÷ 2

 

As a result, every 50 cents you earn over your income threshold will be used to pay the debts in your bankrupt estate.

 

For example, if you earn $110,000 each year before tax, you’ll most likely be paying close to $30,500 each year in tax. Your assessable income would therefore be around $79,500. Assuming you have no other income and no dependents live with you at home, your trustee would calculate your bankruptcy payments as follows:.

 

($79,500 – $55,837.60) ÷ 2 = $11,831.20 (or around $986 each month).

 

Child support contributions.

Your child support contributions are subtracted from your taxable income so the more child support you pay, the less money gets contributed to your bankruptcy estate. Using the previous example, if you are required to pay $15,000 in child support payments yearly, your assessable income would be reduced from $79,500 (income after tax) to $64,500.

 

After providing your trustee with a copy of your child support assessment from the DHS, your trustee would figure out your bankruptcy payments as follows:.

 

($64,500 – $55,837.60) ÷ 2 = $4,331.20 (or around $361 each month).

 

Summary

Whilst blending family law and bankruptcy can be a little complicated, there’s always someone to help you at Bankruptcy Melbourne. If you have any additional concerns relating to bankruptcy and child support payments, or you just need some friendly advice, call our team on 1300 879 867, or alternatively visit our website for more information: www.bankruptcymelbourne.com