Paying it back – how going bankrupt will affect your income

Bankruptcy is something that most of us will hopefully never face.

But should circumstances ever lead you down that path, you’ll need to arm yourself with as much information as possible to keep the situation manageable. It’s simply vital that you understand the processes involved, and how bankruptcy affects income.

What is the bankruptcy income threshold? Will I have to pay?

Becoming bankrupt doesn’t normally prevent you from working, but it could have an impact on your income. If your income exceeds a set amount, this can mean you are obliged to make compulsory payments.

If your Trustee determines you are earning over the threshold, they’ll therefore ask you to pay bankruptcy income contributions.

How much do I have to pay?

The bankruptcy income contribution system works on an annual basis, starting at the anniversary of the date of bankruptcy. Because the bankruptcy period normally lasts for three years, there are three Contribution Assessment Periods, or CAPs, in which the Trustee assesses your contribution liability for the year.

When your bankruptcy commences, the Trustee has to determine your expected income for the next 12 months. This information will be derived from the Statement of Affairs (SOA) form, which you will be required to complete.

At the end of the first period of bankruptcy, (CAP 1), the Trustee will request actual evidence of your income derived during the period, along with an assessment of future earnings expected for the following period, CAP 2.

Your Trustee can then use these figures to determine the contributions you are required to make.

Compulsory income payments are:
  • 50% of the amount you earn above the income threshold (set amount);
  • Paid by you to your Trustee, and may go towards your creditors; and
  • Calculated by your Trustee to determine the amount you need to pay, if any.

The Trustee will make an independent assessment of the income derived by the bankrupt, as it’s not necessarily the same as the income received by the bankrupt from an income tax perspective.

Income derived from any of the sources listed below could increase a bankrupt’s CAP income, even if it might not normally be included in an Income Tax assessment:
  • Income including salary and wages;
  • Fringe benefits and salary sacrifice amounts;
  • Non-cash benefits supplied to a bankrupt e.g. loans from associated entities;
  • Tax refunds;
  • Superannuation payments in excess of 9.5% made by an employer;
  • Allowances that are, additional income and are not expended on work-related expenses;
  • Drawings from a business; and
  • Other income as determined by the Official Trustee.

There are other income sources that could also be affected by bankruptcy income contributions. Most of them are detailed in this document.

By collating and assessing all the above income sources, the Trustee is able to determine a bankrupt’s assessed income. This figure is then reduced by the income threshold amount.

How the income threshold amount is set

The income threshold amount is a set dollar amount that increases according to the number of dependants that the bankrupt has.

Ok, so what is a Dependant?

A dependant is defined as a person who, during the relevant CAP:

  • resides with the bankrupt
  • is wholly or partly dependent on the bankrupt for economic support
  • earns less income than the amount prescribed.

When a bankrupt claims to have dependants, the Trustee may request evidence. If no evidence is supplied, dependents won’t be taken into consideration and the lowest AITA (Actual Income Threshold Amount) will be applied, increasing the contributions payable.

Let’s talk about Cases of Hardship

Should a bankrupt be unable to repay the calculated amounts set by the Trustee, the Bankruptcy Act allows the Trustee to amend an assessment in cases of hardship.

These provisions are used to stop the bankrupt suffering significant financial burden from an assessment. Cases of hardship are usually restricted only to severely disruptive circumstances such as severe injury or illness.

A bankrupt can apply to their Trustee in writing for an amendment if they believe they have grounds for a reduced assessment.

So what happens when it’s all over?

A bankruptcy is usually discharged after the CAP3. However, even after your bankruptcy ends, it’s important to note you will have ongoing obligation to provide income information.

Altogether a bankruptcy discharge dissolves most of your debts, you are still liable to pay the Trustee any income contributions payments still outstanding at the time of discharge, or you will risk becoming re-bankrupted.