What happens if you are bankrupt and don’t pay income contributions

If you go bankrupt, one of the major benefits is you do not have to pay most of the debts which you owe.  However, there are also obligations you have while you are bankrupt, one of which is to pay income contributions.  Income contributions are amounts which a bankrupt has to pay each year if his or her income exceeds a certain indexed threshold, which is available here. 

If you are considering bankruptcy, we have created an Income Contribution Calculator which can assist you assess what income contributions you may have to pay.

How are income contributions assessed and paid

Bankruptcy generally goes for three years.  At the start and end of each year of your bankruptcy, your bankruptcy Trustee will ask you for information and carry out an assessment of what income contributions you have to pay.  They will then issue you with a payment schedule, for example if you had to pay $5,200 for one year they might request you pay $100 a week or $200 a fortnight.

Most bankrupts pay income contributions when required.  And most bankruptcy Trustees will allow some leniency if a bankrupt fails to make some payments and falls behind.

What can happen if a bankrupt falls too far behind in paying income contributions?

If a bankrupt falls too far behind in paying income contributions there can be some serious consequences.  These include:

• A bankruptcy Trustee can ask the Federal Government to issue a Garnishee Notice to a bankrupt’s employer to deduct an amount each pay cycle from their income and pay it directly to their bankruptcy Trustee.

• A bankruptcy Trustee can also ask the Federal Government to issue a notice requiring a bankrupt to set up a special bank account which the Trustee has visibility of so the Trustee can see and account for what funds a bankrupt receives and disburses.

• Failing to pay income contributions is also grounds for a bankruptcy Trustee to extend the period of a bankruptcy so the total period can be up to eight years.  This action can cause massive problems for bankrupts who have to pay income contributions as they will now be required to do so for maybe up to eight years, which can be a significant amount of further payments.

So what should you do?

The first thing you should do is pay income contributions when required.  However, if this is not possible, then you should be proactive and engage with your Trustee as to (a) why you cannot pay income contributions as required and (b) arrange an amended payment plan which may be able to run for a period longer than your bankruptcy.

And if you are having trouble with engaging with your bankruptcy Trustee, then this is a matter we have helped a number of bankrupts with.

Contact us for advice and assistance

If you would like to discuss the contents of this article, or your circumstances in general, please contact Pearce & Heers at our Brisbane or Gold Coast offices for an initial obligation-free consultation.