Bankruptcy and Child Support – Everything You Need to Know

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Declaring bankruptcy certainly isn’t the end of the world, but it does have serious consequences that will have an effect on your finances in the coming years. I’ve found that in many cases, focusing efforts on developing a bright future is the best way for people to manage their bankruptcy and subsequent recovery. To do this, however, folks need to comprehend precisely what bankruptcy entails so they can accurately budget, plan, and rebuild their wealth in the most productive way possible.

One of the most concerning questions I get asked relates to how bankruptcy will have an effect on child support payments. While this topic may appear to be relatively 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 resolve some of that confusion.

 

Does bankruptcy cover child support debts?

While bankruptcy releases you from a wide range of debts, child support is not one of them. If you owe a substantial 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 discuss a repayment plan. If, for whatever reason, you think the assessment provided by the DHS is inaccurate, you can challenge this.

 

How is child support figured out?

The DHS is in charge of overseeing and working with separated parents on child support assessments. To determine 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 using your last tax return as a measure, the DHS will use these numbers to determine your anticipated income for the upcoming year. This showcases the benefit of keeping your tax returns up to date, and any alterations to your circumstances should be relayed to the DHS immediately.

 

Income contributions to your bankrupt estate

An income threshold is utilised to establish if a bankrupt person can afford to contribute some of their income to repay the debts in their bankrupt estate. Despite this, factors like the number of dependents, income tax, child support payments, salary sacrificing, and fringe benefits will affect your income threshold. The following table exhibits the specific threshold limits as of September 2017:

 

The DHS define a dependent as a person who lives with you most of the time and earns no more than $3,539 each 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

 

Consequently, 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 annually before tax, you’ll probably 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 approximately $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 above example, if you are required to pay $15,000 in child support payments yearly, 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 figure out your bankruptcy payments as follows:

($64,500 – $55,837.60) ÷ 2 = $4,331.20 (or about $361 monthly).

 

Summary

Although blending family law and bankruptcy can be a little complicated, there’s always somebody to help you at Bankruptcy Advice Perth. If you have any further inquiries 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: www.bankruptcy-advice.com.au/perth

 

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