Declaring bankruptcy certainly isn’t the end of the world, but it does have severe repercussions that will have a bearing on your finances in the years to come. I’ve discovered that most of the time, focusing efforts on building a bright future is the best way for people to handle their bankruptcy and subsequent recovery. To do this, however, folks have to realise precisely what bankruptcy entails so they can accurately budget, plan, and rebuild their wealth in the most efficient way possible.
One of the most common questions I get asked pertains to how bankruptcy will influence child support payments. Whilst this topic may appear to be relatively straightforward, I’ve found that it creates a lot of misunderstanding so today we’re going to take a closer look and try to clear up some of that confusion.
Does bankruptcy release child support debts?
Even though bankruptcy releases you from a variety of debts, child support is not one of them. If you owe a considerable amount of money in child support when you file for bankruptcy, it will not be released in bankruptcy so it’s best to talk to the Department of Human Services (DHS) and negotiate a repayment plan. If, for whatever reason, you believe the assessment supplied by the DHS is wrong, you can challenge this.
How is child support determined?
The DHS is in charge of regulating and working with separated parents on child support assessments. To determine how much child support you must pay, the DHS evaluate both your income and your care percentage of the children involved. By utilising your latest tax return as a benchmark, the DHS will use these numbers 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 reported to the DHS as quickly as possible.
Income contributions to your bankrupt estate
An income threshold is used to determine if a bankrupt person can afford to contribute some of their income to repay the debts in their bankrupt estate. Despite this, issues like income tax, the number of dependents, fringe benefits, salary sacrificing, and child support will alter your income threshold. The following table displays 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 under $3,539 annually.
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 example, if you earn $110,000 yearly before tax, you’ll most likely be paying roughly $30,500 every 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 each month).
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 above example, if you are required to pay $15,000 in child support payments each year, 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 calculate your bankruptcy payments as follows:.
($64,500 – $55,837.60) ÷ 2 = $4,331.20 (or around $361 per month).
Although blending family law and bankruptcy can be slightly perplexing, there’s always someone to assist you at Bankruptcy Experts Hobart. If you have any more concerns relating to bankruptcy and child support payments, or you just need some friendly advice, speak to our team on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertshobart.com.au