Income while bankrupt?
Bankruptcy exists to provide relief for Australian citizens in situations where they are never going to repay their debt. Formally, this state is defined as being “insolvent”. Insolvency refers to the situation where someone’s income is less than their expenses.
What are Bankruptcy Income Contributions?
The Bankruptcy Act imposes certain restrictions in order to ensure that, where appropriate, creditors do receive some money. These restrictions are not designed as a punishment, but merely to ensure that high-income earners are not trying to avoid their debts through bankruptcy. If the debtor can afford to make some contribution without significant financial hardship, they should consider a personal insolvency agreement or debt consolidation prior to bankruptcy.
How Long do Bankruptcy Income Contributions Last?
Bankruptcy is broken into two periods: the ‘undischarged bankruptcy’ period lasting three years, and the ‘discharged bankruptcy’ period lasting another four years. During the ‘undischarged bankruptcy’ period, restrictions imposed under the Bankruptcy Act apply, including income contributions. During the ‘discharged bankruptcy’ period, the record of bankruptcy appears on credit records but no restrictions apply.
How are Bankruptcy Income Calculations Calculated?
Bankruptcy income contributions are a portion of income paid to creditors during the ‘undischarged bankruptcy’ period. The federal government agency, AFSA, sets bankruptcy income thresholds, above which 50% of the income is paid to creditors. Bankruptcy income thresholds are updated quarterly based on a calculation that is similar to pension adjustments.
The income contribution is calculated on after-tax income. Non-taxable income, such as child support and family tax benefit (FTB), is not included in the calculation. The bankruptcy income thresholds are a sliding scale based on the number of dependants.
Income Threshold Amounts (After Tax)
No Dependants $ 1,066.28/week after tax
One Dependant $1,258.21/week after tax
Two Dependants $1,354.17/week after tax
Three Dependants $1,407.49/week after tax
Four Dependants $1,428.81/week after tax
More Than Four Dependants $1,450.14/week after tax
Bankruptcy Income Contributions and Child Support
John earns $ 1,076.28 a week after taxes. He has no dependants.
$ 1,076.28– $1,066.28(bankruptcy income threshold) = $10.00, 50% = $5.00
John’s Bankruptcy Income Contribution = $5.00 per week for 3 years.
Child support is non-taxable income. It is paid out of after-tax income by the non-custodial parent to the custodial parent for the child’s care. If you are paying child support but do not have any dependants for taxation purposes, the Zero Dependant ‘bankruptcy income threshold’ applies, but the child support is added on to your threshold for determining your ‘bankruptcy income threshold’.
How are Bankruptcy Income Contribution Payments Made?
Income contributions are collected by the bankruptcy trustee, who is appointed by AFSA to ensure that creditors receive all the money that they are entitled to under the Bankruptcy Act. A forward projection of income is made and an estimate of bankruptcy income contributions is made by the bankruptcy trustee. The bankrupted person generally pays these funds into a trust account. If the payments are not made, the bankruptcy can be extended by up to five years. At the end of the year, the bankruptcy income contributions are assessed against actual income and a refund or bill may be issued, similar to a tax refund.
Bankruptcy Income Contributions and Tax Refunds
The first tax refund that is received during the ‘undischarged bankruptcy’ period will be kept and distributed to creditors. This income was earned before the bankruptcy and thus is after-tax income. Future tax refunds will usually be kept.
*Please be aware that any figures on this website may change slightly from time to time. Updated 04/04/2017