Declaring bankruptcy certainly isn’t the end of the world, but it does have significant implications that will affect your finances in the coming years. I’ve found that most of the time, focusing efforts on building a bright future is the best way for folks to manage their bankruptcy and consecutive recovery. To do this, however, individuals must be aware of precisely what bankruptcy entails so they can successfully budget, plan, and rebuild their wealth in the most efficient way possible.

 

One of the most frequent questions I get asked relates to how bankruptcy will influence child support payments. Although this topic may seem relatively straightforward, I’ve found that it leads to a lot of misunderstanding so today we’re going to take a closer look and try to resolve some of that confusion.

 

Does bankruptcy cover child support debts?

Whilst bankruptcy releases you from a variety of debts, child support is not one of them. If you owe a large amount of money in child support when you declare bankruptcy, it will not be released in bankruptcy so it’s best to talk to the Department of Human Services (DHS) and arrange a repayment plan. If, for whatever reason, you feel the assessment given by the DHS is wrong, you can contest this.

 

How is child support calculated?

The DHS is responsible for overseeing and dealing with separated parents on child support assessments. To ascertain how much child support you must pay, the DHS assess both your income and your care percentage of the children involved. By utilising your last tax return as a benchmark, the DHS will use these numbers to determine your anticipated income for the upcoming year. This showcases the benefit of keeping your tax returns up to date, and any changes to your circumstances should be relayed to the DHS immediately.

 

Income contributions to your bankrupt estate

An income threshold is used to ascertain if a bankrupt person can afford to contribute some of their income to pay off the debts in their bankrupt estate. Despite this, factors like child support, the number of dependents, income tax, fringe benefits, and salary sacrificing will influence your income threshold. The following table exhibits the related 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

 

Consequently, every 50 cents you earn over your income threshold will be used to settle the debts in your bankrupt estate.

 

For example, if you earn $110,000 each year before tax, you’ll probably be paying roughly $30,500 every year in tax. Your assessable income would therefore be roughly $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 roughly $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 every year, your assessable income would be reduced from $79,500 (income after tax) to $64,500.

 

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

 

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

 

Summary

While blending family law and bankruptcy can be a little confusing, there’s always someone to help you at Bankruptcy Experts Perth. If you have any additional queries relating to bankruptcy and child support payments, or you just need some friendly advice, contact our team on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertsperth.com.au