Declaring bankruptcy really 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 most of the time, focusing efforts on building a bright future is the best way for individuals to deal with their bankruptcy and succeeding recovery. To do this, however, people have to 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 common questions I get asked is related to how bankruptcy will have a bearing on child support payments. While this topic may appear to be fairly straightforward, I’ve found that it leads to 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 release child support debts?
Although bankruptcy releases you from a wide 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 reach out to the Department of Human Services (DHS) and arrange a repayment plan. If, for whatever reason, you feel the assessment provided by the DHS is inaccurate, you can contest this.
How is child support calculated?
The DHS is accountable for supervising and working with separated parents on child support assessments. To determine how much child support you must pay, the DHS investigate 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 emphasises the importance of keeping your tax returns up to date, and any alterations to your circumstances should be reported to the DHS as soon as possible.
Income contributions to your bankrupt estate
An income threshold is utilised to establish if a bankrupt person can afford to contribute some of their income to pay off the debts in their bankrupt estate. Despite this, variables like the number of dependents, child support payments, income tax, salary sacrificing, and fringe benefits will have an effect on your income threshold. The following table reveals the specific 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
Hence, every 50 cents you earn over your income threshold will be used to pay off the debts in your bankrupt estate.
As an example, if you earn $110,000 annually before tax, you’ll probably 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 approximately $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 yearly, your assessable income would be decreased 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 figure out your bankruptcy payments as follows:.
($64,500 – $55,837.60) ÷ 2 = $4,331.20 (or around $361 each month).
Although combining family law and bankruptcy can be slightly complex, there’s always somebody to assist you at Bankruptcy Experts Emerald. If you have any additional inquiries relating to bankruptcy and child support payments, or you just need some friendly advice, reach out to our team on 1300 795 575, or alternatively visit our website for additional information: www.bankruptcyexpertsemerald.com.au