One of the most concerning questions I get asked relates to how bankruptcy will influence child support payments. Whilst this topic may seem rather straightforward, I’ve found that it creates 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?
Even though bankruptcy releases you from a wide range of debts, child support is not one of them. If you owe a considerable amount of money in child support when you declare bankruptcy, it will not be released in bankruptcy so it’s best to phone the Department of Human Services (DHS) and negotiate a repayment plan. If, for whatever reason, you believe the assessment given by the DHS is incorrect, you can challenge this.
How is child support determined?
The DHS is in charge of managing and working with separated parents on child support assessments. To ascertain how much child support you must pay, the DHS review both your income and your care percentage of the children involved. By using your last tax return as a measure, the DHS will use these numbers to calculate your estimated income for the coming year. This highlights the benefit of keeping your tax returns up to date, and any adjustments 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 individual can afford to contribute some of their income to pay off the debts in their bankrupt estate. Despite this, factors like child support, the number of dependents, income tax, fringe benefits, and salary sacrificing will alter your income threshold. The following table displays the relevant threshold limits as of September 2017:
The DHS define a dependent as an individual who lives with you most of the time and earns below $3,539 every year.
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 settle the debts in your bankrupt estate.
As an example, 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 approximately $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 about $986 per 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 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 approximately $361 each month).
Whilst blending family law and bankruptcy can be a little confusing, there’s always someone to help you at Bankruptcy Experts. If you have any further concerns relating to bankruptcy and child support payments, or you just need some friendly advice, speak with our team on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertstaree.com.au