Declaring bankruptcy really isn’t the end of the world, but it does have severe repercussions that will have a bearing on your finances in the future. I’ve found that in most cases, focusing efforts on building a bright future is the best way for individuals to deal with their bankruptcy and subsequent recovery. To do this, however, folks must understand exactly what bankruptcy entails so they can effectively budget, plan, and rebuild their wealth in the most productive way possible.

 

One of the most common questions I get asked pertains to how bankruptcy will impact child support payments. While this topic may appear to be relatively straightforward, I’ve found that it causes a lot of misunderstanding so today we’re going to take a closer look and attempt to resolve some of that confusion.

 

Does bankruptcy cover 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 sizable amount of money in child support when you file for 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 think the assessment supplied by the DHS is incorrect, you can contest this.

 

How is child support measured?

The DHS is responsible for regulating and working with separated parents on child support assessments. To figure out how much child support you must pay, the DHS evaluate both your income and your care percentage of the children involved. By utilising your last tax return as a measure, the DHS will use these figures to determine your expected income for the forthcoming year. This emphasises the importance of keeping your tax returns up to date, and any alterations to your circumstances should be presented to the DHS immediately.

 

Income contributions to your bankrupt estate

An income threshold is utilised to ascertain if a bankrupt person can afford to contribute some of their income to settle 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 relevant threshold limits as of September 2017:

 

The DHS define a dependent as an individual who lives with you most of the time and earns less than $3,539 annually.

 

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

 

(assessable income – income threshold amount) ÷ 2

 

Subsequently, 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 yearly before tax, you’ll probably be paying approximately $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 around $986 monthly).

 

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 around $361 monthly).

 

Summary

Although combining family law and bankruptcy can be slightly complicated, there’s always somebody to assist you at Bankruptcy Experts Newcastle. If you have any further 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 further information: www.bankruptcyexpertsnewcastle.com.au