Bankruptcy and Child Support – Everything You Should Know

Declaring bankruptcy really isn’t the end of the world, but it does have considerable implications 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, individuals have to grasp precisely what bankruptcy entails so they can accurately budget, plan, and rebuild their wealth in the most functional way possible.

One of the most frequent questions I get asked pertains to how bankruptcy will have an effect on child support payments. While this topic may seem pretty straightforward, I’ve found that it causes 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?

While bankruptcy releases you from a wide variety 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 consult the Department of Human Services (DHS) and arrange a repayment plan. If, for whatever reason, you believe the assessment given by the DHS is inaccurate, you can challenge this.


How is child support determined?

The DHS is in charge of overseeing and working with separated parents on child support assessments. To ascertain how much child support you must pay, the DHS take a look at both your income and your care percentage of the children involved. By utilising your previous tax return as a measure, the DHS will use these numbers to figure out your expected income for the upcoming year. This highlights the importance of keeping your tax returns up to date, and any changes to your circumstances should be presented to the DHS immediately.


Income contributions to your bankrupt estate

An income threshold is utilised 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 the number of dependents, income tax, child support payments, salary sacrificing, and fringe benefits will have an effect on your income threshold. The following table features the related threshold limits as of September 2017:


The DHS define a dependent as an individual who lives with you most of the time and earns no more than $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


Hence, 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 annually before tax, you’ll probably be paying about $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 approximately $986 per 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 each 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 figure out your bankruptcy payments as follows:

($64,500 – $55,837.60) ÷ 2 = $4,331.20 (or roughly $361 per month).


Even though mixing family law and bankruptcy can be a little complicated, there’s always somebody to assist you at Bankruptcy Advice. If you have any more questions relating to bankruptcy and child support payments, or you just need some friendly advice, get in touch with our team on 1300 879 867, or alternatively visit our website for more information: