It is not uncommon for us to hear individuals facing financial difficulty to remark, ‘well if I go bankrupt, I lose all of my income’.
When an individual enters into bankruptcy, they can still earn an income, however bankruptcy may have an impact on how much of their income they can retain.
There are no limitations on how much money a bankrupt can earn; however if they earn above a set amount, they are required to contribute compulsory payments into their bankrupt estate.
What is the set amount?
The set amount, or threshold, varies and is calculated by taking the Base Income Threshold Amount (“BITA”) and increasing it, depending on how many dependants the bankrupt has, to arrive at the Actual Income Threshold Amount (“AITA”) that is applicable to the bankrupt.
The current thresholds are listed below and are updated in March and September each year. Please note these are after-tax figures:
As at 20 September 2021 | Threshold (after-tax) |
BITA | $60,515.00 |
AITA – subject to number of dependents |
|
0 | $60,515.00 |
1 | $71,407.70 |
2 | $76,854.05 |
3 | $79,879.80 |
4 | $91,090.10 |
More than 4 | $82,300.40 |
How does the Trustee calculate the income contribution amount?
For income contribution purposes, each year of bankruptcy is called a Contribution Assessment Period (“CAP”). An initial assessment of future income for the first year of the bankruptcy is made by the Trustee in the early stages of the process.
If the bankrupt is estimated to earn less than the applicable threshold, then income contributions will be zero for CAP 1 (aka year 1).
If the bankrupt is estimated to earn more than the applicable threshold, 50% of income above the threshold needs to be paid into the estate. Payments are normally synchronised to pay cycles (weekly or fortnightly for example), or by agreement with the Trustee. Matching contribution payments to pay cycles is a way to help a bankrupt budget for day-to-day living expenses and to prevent any surprises along the way if circumstances change.
The initial income estimate is then reconciled at the first anniversary date (end of CAP 1) and a shortfall in contributions are caught up and any additional amounts can be credited to the following CAP cycle.
CAP 2 and CAP 3 are treated in the same way; however any payments made above the AITA in the final year are not refunded to the bankrupt at the conclusion of the bankruptcy.
Example
Sally went bankrupt in late 2021 as a result of credit card and personal loan debts that became unmanageable.
She works as an engineer and earns $95,000 a year after tax. Sally has two dependents and is paid fortnightly.
Her workings are below:
Annual after tax income | $95,000.00 |
Less applicable AITA threshold | ($76,854.05) |
Amount above threshold | $18,145.95 |
50% of above-threshold amount | $9,072.97 |
Fortnightly contribution amount – CAP 1 | $348.96 |
Other issues
- Changes in employment and income circumstances should be reported to the Trustee as soon as possible.
- A bankrupt may apply for hardship under the Bankruptcy Act, which can alter how much is paid into the estate.
- A bankrupt may request that the Inspector-General in Bankruptcy review the Trustee’s calculations.
- Economic support payments are excluded from the calculation of income during bankruptcy and are not classed as an asset of the bankrupt.
- COVID-19 supplementary payments are claimable by a Trustee in the form of an asset if the funds are held in a bank account maintained by the individual before bankruptcy. Additionally, the payments form part of the income contribution calculation during bankruptcy.
Closing comments
Our approach is to work with a bankrupt to acquit their responsibilities to pay income contributions during the term of their bankruptcy.
If you have any specific queries about how this regime works in practice, please feel free to get in touch with me or any of our experienced team members for assistance.
About the author
Greg Quin is a Partner and Registered Liquidator at HLB Mann Judd Insolvency WA and has been with the team for 12 years. Greg oversees the daily operations of the many insolvency appointments managed by the HLB Insolvency team and looks after the operations of the practice.
If you have any queries about insolvency matters, please feel free to contact Greg on 08 9215 7900, 0402 943 091 or via email to gquin@hlbinsol.com.au.
