Declaring bankruptcy definitely isn’t the end of the world, but it does have serious consequences that will affect your finances in the future. I’ve discovered that most of the time, focusing efforts on developing a bright future is the best way for folks to tackle their bankruptcy and consecutive recovery. To do this, however, folks need to appreciate exactly what bankruptcy entails so they can effectively budget, plan, and rebuild their wealth in the most proficient way possible.
One of the most concerning questions I get asked relates to how bankruptcy will influence child support payments. While this topic may appear to be rather 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 release child support debts?
Although bankruptcy releases you from a variety 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 connect with the Department of Human Services (DHS) and negotiate a repayment plan. If, for whatever reason, you feel the assessment presented by the DHS is wrong, you can challenge this.
How is child support measured?
The DHS is accountable for regulating and working with separated parents on child support assessments. To establish how much child support you must pay, the DHS consider 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 calculate your anticipated income for the upcoming year. This highlights the value of keeping your tax returns up to date, and any alterations to your circumstances should be relayed to the DHS immediately.
Income contributions to your bankrupt estate
An income threshold is used to verify 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 affect your income threshold. The following table reveals the specific threshold limits as of September 2017:
The DHS define a dependent as someone who lives with you most of the time and earns no more than $3,539 yearly.
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 settle the debts in your bankrupt estate.
For instance, if you earn $110,000 yearly before tax, you’ll likely be paying close to $30,500 every 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 monthly).
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 above example, if you are required to pay $15,000 in child support payments annually, 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 determine your bankruptcy payments as follows:.
($64,500 – $55,837.60) ÷ 2 = $4,331.20 (or about $361 per month).
Although blending family law and bankruptcy can be slightly complex, there’s always someone to help you at Bankruptcy Experts Northern Rivers. If you have any more concerns 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.bankruptcyexpertsnorthernrivers.com.au