Income Contributions by a Bankrupt

A Bankrupt is entitled to be employed and earn income during his/her bankruptcy. However the Bankruptcy Act provides that a Bankrupt should also pay contributions to his/her Trustee (Estate) from the income earned by the Bankrupt.

A Bankrupt’s income is assessed to determine what contributions should be paid by the Bankrupt to his/her Estate. The Bankruptcy Act 1966 sets out the definition of “Income” which is to be assessed for this purpose.

The rationale for this is that it is equitable that some of the income earned by the Bankrupt during the bankruptcy period should be utilised to make payment of prior debts and this is provided for in the Bankruptcy Act.

Certain amounts are excluded and are not treated as income for the purposes of the contribution assessment. These are set out in section 139L(b) of the Act. Additionally certain amounts are deductable from “after tax income”, for example, deductions are available for payments to support a child if they are paid in terms of a Maintenance Agreement under the Family Law Act or pursuant to a Maintenance Order. Deductions are also available for certain business expenses pursuant to section 139N of the Bankruptcy Act.

A Bankrupt must provide details of his income to his Trustee and it is an offence for a Bankrupt to not co-operate with his Trustee and complete the relevant Income Assessment Forms.

The income contribution to be paid by a Bankrupt to his Trustee (Estate) is a calculation made on assessed income which is the surplus of income after tax, proper deductions and Medicare. A contribution will be payable by the Bankrupt if the assessed income is more than the applicable and current statutory threshold. The amount of the threshold is based on the number of dependents that a Bankrupt has during that particular assessment period. A Trustee is entitled to receive 50% of the balance over the threshold amount.  Accordingly, the “over threshold after tax income” is divided equally between the Trustee and the Bankrupt.

If an assessment is made and the Bankrupt fails to pay such amount to the Trustee the Trustee can “garnishee those monies” by issuing a notice to the Bankrupt’s employer or other people that owe the Bankrupt money.

For further information please contact Trevor Rosenthal on telephone (03) 8680 5555 or email trosenthal@battensacks.com.au.

Please note that the advice in this communication is general advice only and you should not rely on this advice unless you obtain legal advice specific to your own requirements.