Bankruptcy – what happens to your income during bankruptcy

During bankruptcy your only obligation in regard to your income is to pay income contributions if your income exceeds the ‘threshold amount’ set by the government. The threshold amount ranges from $55,837.60 after tax if you have no dependants to $75,939.14 after tax if you have more than four dependants.

If your income exceeds the threshold amount, for each after tax dollar earned above the threshold you keep half and pay the other half to your bankrupt estate.

The legislation allows persons subject to bankruptcy to earn a very good income and has been set at a high level to ensure that you have enough to pay your bills and live a normal life. You operate your own bank account, without the involvement of your Bankruptcy Trustee. It is your money.

You can save during bankruptcy and your savings are protected provided they are kept in a bank account (it can be interest bearing). However, your savings can not be put into investments or managed funds, used to purchase a boat or caravan etc. Subsequent to being discharged from bankruptcy your savings in your bank account are your property for you to spend how you wish.

Below are answers to questions we are commonly asked regarding the income that a person can keep during bankruptcy:

  • Can you give money to your church or charity?  YES
  • Can you buy household items ie a replacement fridge?  YES
  • Can you save for a holiday?  YES
  • Can you give money to family members in Australia or overseas? YES
  • Can you save to have savings in the bank in case unexpected expenses occur eg car gearbox fails?  YES
  • Can you give your children financial assistance to help them through university? YES
  • Is there a limit on how much money you can save? NO (but it must be kept in the same bank account your wages are paid into)
  • Does the income of the non bankrupt spouse have any impact on the bankruptcy? NO – Provided the income of the bankrupt person has not been redirected to the non-bankrupt spouse

Below are some examples of what can be done re your income during bankruptcy:

  • Ben is married, has two dependent children aged 8 and 10. Ben earns $42,000 per annum after tax. Ben’s wife works as a teacher and earns $65,000 per annum after tax. Ben filed for bankruptcy. Ben’s wife did not file for bankruptcy. Ben has been offered work on the weekends and would earn $15,000 per annum after tax from the additional job. He has asked what impact bankruptcy will have on the additional income.

ANSWER – As Ben has two children, his income would have to exceed the income threshold for two dependants ($70,913.75) before he would have to pay income contributions. The income of Ben’s wife is not relevant to working out Ben’s income to determine whether he would have to pay income contributions. If Ben takes on the additional work his after tax income will increase from $42,000 per annum to $57,000 per annum ($42,000 plus $15,000). The total income for Ben of $57,000 is below the income threshold and all income earned by Ben would be available for Ben and his family.

  • Tom has filed for bankruptcy and is single, has no dependants and earns $42,000 per annum after tax. Tom has been offered work on the weekend and would earn $15,000 per annum after tax for the additional work. Tom is considering whether to take on the additional work.

ANSWER – As Tom has no dependants his income threshold is $55,837.60 per annum. If Tom takes on the additional job his income will be $57,000 after tax. Tom’s income would exceed the threshold by $1,162.40 and he would have to pay half of the excess, $581.20, to his bankrupt estate. Accordingly, the after tax income available to Tom if he takes on the extra work would be $56,418.80 ($55,837.60 plus $581.20)

Alan Nicholls’ no obligation help desk

Nicholls & Co provide a free, no obligation ‘help desk’ for people considering bankruptcy – we discuss and explain bankruptcy and answer questions for anyone who is considering bankruptcy. The Nicholls & Co help desk can be accessed by phone (1300 060 122) or helpdesk@nichollsco.com.au . Alan Nicholls, Registered Trustee in Bankruptcy is also available to answer your questions to enable you to decide if bankruptcy is right for you.