There is a common misconception amongst the general public that once you become bankrupt, all your property will be taken away from you and divided amongst your creditors. However, bankruptcy law works so your creditors will benefit while you can financially support yourself and any dependants you may have. It is therefore encouraged that you continue to work and earn income while you are bankrupt.

Income Contributions

Income contributions are a certain amount that is calculated based on the income you have earned. This amount may then need to be paid to your trustee periodically.

Will I need to pay Income Contributions?

If you are bankrupt, you may need to make payments to the trustee from your income if you earn over a threshold amount as stated in the National Personal Insolvency Index (NPII) ($53, 653.60 (as at March 2015) net after tax per annum). It must be noted that the income threshold limit changes throughout the year so it is strongly advised you ensure you have the correct income limit by checking with the Australian Financial Security Authority. It may also depend on whether you financially support any dependants (including your partner). For example, if you have one dependant, you are permitted to earn and retain an income of approximately $63,311.25 (as at March 2015) net after tax per annum. If the assessed income is less than the appropriate threshold, no contribution needs to be paid.

This means that the savings from your income during the period of bankruptcy does not become acquired property. Accordingly, if you save funds after paying income contributions, you are entitled to keep the excess money you earn.

How are income contributions calculated?

If your income is above the indexed threshold amount, your trustee will undergo an Income Contributions Assessment to determine how much you will have to pay. As such, you will have to pay 50 cents in each dollar above the threshold. That essentially means that the income contribution amount is calculated by subtracting the threshold amount from your assessed income and halving the result.

How often will I have to pay income contributions?

The trustee has the power to decide how often you will have to pay the contributions, such as weekly, fortnightly and so on. The trustee can also extend the bankruptcy period (giving reasons) and also order a garnishee order that enables the trustee to recover money from third parties. For instance, the trustee can require your employer to hold back part of your income and send it directly to the trustee.

Hardship

You may also challenge the assessment on certain grounds of hardship. You must apply to the trustee in writing. Some of the grounds in which you can apply to the trustee are where:

  • You or a dependant suffers from an illness or disability and requires, for example, medical attention, medicines, equipment or treatment;
  • You need to pay child day care so as to enable you to go to work;
  • You are living in rented accommodation and the rent increases;
  • Your company has moved office locations and your travelling expenses to work from home have increased substantially; and
  • Your spouse or de facto partner has recently retired so you are now relying on one source of income.

Conclusion

As you can see, there are many factors that may entitle you to apply for an Income Contribution Assessment review. What happens to your income once you are bankrupt is very important and complex so it is strongly advised that you seek assistance from an insolvency specialist so as to be fully informed of your rights and obligations. If you would like to discuss your situation with a LegalVision lawyer, please give us a call. We will assess your needs free of charge and provide a fixed-fee quote for any services you require.

Jill McKnight

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