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How Much can you earn under bankruptcy?
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 people are not trying to avoid their debts through bankruptcy.
How Long do Bankruptcy Income Contributions Last?
Bankruptcy is broken into two periods; the “undischarged bankruptcy” period lasting 3 years, and a “dishcharged bankruptcy” period lasting a further 4 years. During the “undischarged bankruptcy” period the restrictions imposed under the Bankruptcy Act, including income contributions, apply. 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 department, ITSA, sets “bankruptcy income thresholds” above which 50% of the income is paid to creditors. The bankruptcy income thresholds are updated quarterly based on a similar calculation to pension adjustment.
The income contribution is calculated on after-tax income. Non-taxable income like 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.
Current Thresholds
Example 1 Calculation
John earns $850 a week after tax. He has no dependants.
$850 – $804.30 (bankruptcy income threshold) = $37.65, 50% = $18.83
John’s Bankruptcy Income Contribution = $18.83 per week for 3 years
Bankruptcy Income Contributions and Child Support
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. 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 to determine your “bankruptcy income threshold”.
How are Bankruptcy Income Contribution Payments Made?
Income contributions are collected by the bankruptcy trustee who is appointed by ITSA to ensure that creditors receive all the money 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 bankrupt generally pays these funds into a trust account. If the payments are not made the bankruptcy can be extended by up to 5 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 generally be able to be kept.