Once you have your bankruptcy number, you are drawing a line in the sand for a fresh start. Don’t waste that opportunity. Get your life back in balance, then work hard to enjoy it and create a quality future.
Some people worry about paying income contributions to their bankrupt estate during their bankruptcy and may even consider getting another job with an income below the threshold amount.
Don’t laugh. We have seen it happen, but we say don’t be concerned about paying income contributions. We say ‘embrace it’ because it gives you a chance to build the future you want. Not convinced? Check out this example of the opportunity bankruptcy can create.
Tom is 33, single, earns $90,000 a year before tax and is dismayed to find that if he files for bankruptcy he needs to pay $5255 in income contributions for each of the three years of his bankruptcy.
At this point, he has $15,000 in super. Tom has thought about resigning from his current job to take one that pays around $73,500 per year to avoid paying any contributions.
So, let’s imagine Tom earns $73,500 a year for the three years of his bankruptcy and then, after he is discharged, he earns $90,000 every year until he retires in 2055 at the age of 70.
Working on the existing super contribution rate of 9.5 per cent with ASIC’s Money Smart calculator, we estimate Tom will have $597,002 when he retires, assuming an interest rate of five per cent.
Now, let’s look at Tom continuing to work for $90,000 during the three years of bankruptcy, living on $1087 (the take-home pay within the threshold), paying his income contributions to his bankrupt estate and paying the income above the threshold he is entitled to keep ($5255) to his super fund as a non-deductible contribution. After he is discharged from bankruptcy he will keep earning $90,000 until he retires. Crunching the numbers on the same basis as before, we estimate Tom will have $629,540 at retirement in 2055 – which means he will be $32,538 better off.
Many people don’t realise that what happens early in their retirement savings plan can have a big impact on when they retire and how comfortable – or not – life will be. And that ‘plan’ can include a bankruptcy, if you use that bankruptcy wisely.
We recommend you read the government web site www.moneysmart.gov.au. It is excellent and may tell you lots you did not know. For example, were you aware that the proposed retirement age for men in the future will be 67 (from 2023) compared to 65.5 today, and 70 from 2035?
There is truth in the advertising jingle that suggests from little things big things grow – and bankruptcy can actually give you the chance to start building your financial future.
If you work during the three years of bankruptcy, the super your employer pays is not caught by your bankruptcy and accumulates in your super fund.
If you are earning enough to make income contributions, remember you don’t have to contribute every cent over the threshold. If you earn $10,000 over the threshold, you must pay $5000 to the bankrupt estate. The other $5000 is yours, to add to super, or save for something else.
So don’t change jobs. Continue in the higher paying job, make the required income contributions to your bankrupt estate and use the remaining amount to build towards your future. With your employer paying their mandatory contributions on the level of your salary, a higher salary means more into super and a better future for you.
When looking at your superannuation and deciding what to do, we recommend you speak to the fund administrator or a creditable, licensed financial adviser.