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 coming years. I’ve found that in most cases, focusing efforts on developing a bright future is the best way for people to deal with their bankruptcy and consecutive recovery. To do this, however, people need to understand precisely what bankruptcy entails so they can effectively budget, plan, and rebuild their wealth in the most functional way possible.
One of the most routine questions I get asked pertains to how bankruptcy will influence child support payments. While 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 resolve some of that confusion.
Does bankruptcy release child support debts?
Even though bankruptcy releases you from a 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 contact the Department of Human Services (DHS) and arrange a repayment plan. If, for whatever reason, you believe the assessment given by the DHS is incorrect, you can contest this.
How is child support measured?
The DHS is in charge of supervising and dealing with separated parents on child support assessments. To calculate how much child support you must pay, the DHS inspect both your income and your care percentage of the children involved. By using your latest tax return as a measure, the DHS will use these numbers to figure out your expected income for the forthcoming year. This showcases the value of keeping your tax returns up to date, and any alterations to your circumstances should be reported to the DHS immediately.
Income contributions to your bankrupt estate
An income threshold is used to verify if a bankrupt individual can afford to contribute some of their income to repay the debts in their bankrupt estate. Despite this, matters like child support, the number of dependents, income tax, fringe benefits, and salary sacrificing will alter your income threshold. The following table reveals the specific 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 each year.
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
Hence, 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 most likely be paying around $30,500 each 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 determine your bankruptcy payments as follows:.
($79,500 – $55,837.60) ÷ 2 = $11,831.20 (or about $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 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 supplying 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 around $361 monthly).
While mixing family law and bankruptcy can be a little confusing, there’s always someone to assist you at Bankruptcy Experts Cairns. If you have any further queries relating to bankruptcy and child support payments, or you just need some friendly advice, get in contact with our team on 1300 795 575, or alternatively visit our website for additional information: www.bankruptcyexpertscairns.com.au