Declaring bankruptcy really isn’t the end of the world, but it does have significant repercussions that will impair your finances in the future. I’ve found that in many cases, focusing efforts on building a bright future is the best way for individuals to tackle their bankruptcy and subsequent recovery. To do this, however, individuals need to understand exactly what bankruptcy entails so they can accurately budget, plan, and rebuild their wealth in the most efficient way possible.
One of the most common questions I get asked relates to how bankruptcy will influence child support payments. Whilst this topic may seem fairly straightforward, I’ve found that it causes a lot of misunderstanding so today we’re going to take a closer look and try to clear up some of that confusion.
Does bankruptcy release child support debts?
Even though bankruptcy releases you from a wide range of debts, child support is not one of them. If you owe a hefty amount of money in child support when you file for bankruptcy, it will not be released in bankruptcy so it’s best to reach out to the Department of Human Services (DHS) and negotiate a repayment plan. If, for whatever reason, you believe the assessment supplied by the DHS is incorrect, you can contest this.
How is child support measured?
The DHS is responsible for regulating and dealing with separated parents on child support assessments. To figure out how much child support you must pay, the DHS consider both your income and your care percentage of the children involved. By utilising your previous tax return as a measure, the DHS will use these numbers to calculate your expected income for the forthcoming year. This highlights the benefit of keeping your tax returns up to date, and any alterations to your circumstances should be presented to the DHS as soon as possible.
Income contributions to your bankrupt estate
An income threshold is used to determine if a bankrupt person can afford to contribute some of their income to repay the debts in their bankrupt estate. Despite this, issues like the number of dependents, income tax, child support payments, salary sacrificing, and fringe benefits will alter your income threshold. The following table features the related threshold limits as of September 2017:
The DHS define a dependent as anyone who lives with you most of the time and earns below $3,539 annually.
Assuming you earn over the income threshold, your trustee would determine 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 repay the debts in your bankrupt estate.
For example, if you earn $110,000 each year before tax, you’ll likely be paying approximately $30,500 every year in tax. Your assessable income would therefore be approximately $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 deducted 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 each year, your assessable income would be reduced from $79,500 (income after tax) to $64,500.
After delivering 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 about $361 each month).
Even though blending family law and bankruptcy can be slightly complicated, there’s always somebody to help you at Bankruptcy Experts Wangaratta. If you have any more concerns relating to bankruptcy and child support payments, or you just need some friendly advice, talk to our team on 1300 795 575, or alternatively visit our website for additional information: www.bankruptcyexpertswangaratta.com.au