Declaring bankruptcy definitely isn’t the end of the world, but it does have significant consequences that will have a bearing on your finances in the years to come. I’ve discovered that in many cases, focusing efforts on building a bright future is the best way for individuals to handle their bankruptcy and consecutive recovery. To do this, however, folks need to appreciate exactly what bankruptcy entails so they can accurately budget, plan, and rebuild their wealth in the most efficient way possible.
One of the most routine questions I get asked relates to how bankruptcy will impact child support payments. While this topic may seem 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 cover child support debts?
Whilst bankruptcy releases you from a wide range 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 visit the Department of Human Services (DHS) and arrange a repayment plan. If, for whatever reason, you believe the assessment delivered by the DHS is inaccurate, you can challenge this.
How is child support figured out?
The DHS is accountable for managing and working with separated parents on child support assessments. To figure out how much child support you must pay, the DHS look at 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 estimated income for the forthcoming year. This emphasises the importance of keeping your tax returns up to date, and any adjustments to your circumstances should be relayed to the DHS as quickly as possible.
Income contributions to your bankrupt estate
An income threshold is used to determine if a bankrupt individual can afford to contribute some of their income to settle the debts in their bankrupt estate. Despite this, issues like income tax, the number of dependents, fringe benefits, salary sacrificing, and child support will have an effect on your income threshold. The following table exhibits the relevant threshold limits as of September 2017:
The DHS define a dependent as a person who lives with you most of the time and earns under $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
Subsequently, every 50 cents you earn over your income threshold will be used to pay off the debts in your bankrupt estate.
For instance, if you earn $110,000 every year 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 determine 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 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 decreased 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 calculate your bankruptcy payments as follows:.
($64,500 – $55,837.60) ÷ 2 = $4,331.20 (or about $361 monthly).
Although combining family law and bankruptcy can be a little confusing, there’s always someone to assist you at Bankruptcy Experts Port Macquarie. If you have any more inquiries relating to bankruptcy and child support payments, or you just need some friendly advice, talk with our team on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertsportmacquarie.com.au