Income Contributions in Bankruptcy: How Much of Your Income You Keep

Income Contributions in Bankruptcy: How Much of Your Income You Keep

The single biggest fear I hear about bankruptcy is money: "If I go bankrupt, do they take my wage?" People picture the trustee standing at the ATM taking half of every dollar. That's not how it works. Being bankrupt doesn't stop you working, and there is no limit on how much you can earn. What the rules do is set a line — and only the income above that line gets shared.

Here's exactly how that works, so you can see the real number instead of the scary one in your head.

There's no cap — the threshold just decides when you start sharing

Say it plainly: you can earn as much as you like. The threshold isn't a ceiling on your income; it's the point at which contributions kick in. Everything up to the threshold is yours, full stop. Only the income above it comes into the calculation.

That's why a wage earner on an ordinary income, especially with a family, very often pays nothing at all. The people who get into trouble are the ones who try to route income through a spouse or a company to hide it — trustees cross-check against tax returns, and it never ends the way they hoped.

The formula: you pay half of the excess

The maths is simple, and it's set by law — neither your trustee nor your advisor can change it:

(Assessed income − income threshold) ÷ 2

You pay half of what you earn above the threshold, and keep the other half. So the contribution is only ever a share of the excess, not a share of the whole lot. Earn a little over the line and the contribution is small. Earn well over it and you're still keeping everything up to the threshold plus half of the rest.

The threshold itself depends on whether you have dependants, and it's indexed — adjusted twice a year. Because it moves, I won't quote a figure that'll be stale by the time you read this; check the current amount at afsa.gov.au. A dependant is generally someone who lives with you, relies on you financially, and earns under the government-prescribed limit. More dependants lift your threshold, which means you can earn more before any contribution is payable. You may be asked to prove the dependency.

It's not taken from each pay packet

This is where most people have it wrong. The trustee doesn't skim a slice off every wage. Bankruptcy runs in 12-month blocks called Contribution Assessment Periods (CAPs), and each one is assessed separately.

At the start of a period, the trustee estimates your expected after-tax income and sets a contribution. You pay it by instalments — usually lined up with how you're paid, weekly, fortnightly or monthly. At the end of the period there's a reconciliation: if you earned more than assessed, you pay the shortfall; if you earned less, you get a credit. It's an estimate trued up against reality, not a raid on your bank account.

If you don't pay, though, the trustee can have contributions taken straight from your wages or bank account, and unpaid contributions can extend the bankruptcy to five or even eight years. The debt survives discharge regardless. Paying is not optional.

What counts as income — it's broader than your payslip

For contribution purposes, "income" is wider than taxable income. It can include:

• Wages and salary
• Business drawings
• Bonuses and allowances
• Fringe benefits (and extra super beyond the compulsory amount)
• Some Centrelink payments
• Income earned through companies or trusts connected to you
• Fees paid to others on your behalf

Some things are excluded — compulsory superannuation, child support received under a formal arrangement, and certain disability or family assistance payments. The point is not to catch you out; it's that the trustee looks at what you actually live on, not just the number at the bottom of your group certificate.

The windfall trap — this is the one that catches people

Here's the trap most people miss, and it's an expensive one. A lottery win, an inheritance, or a gifted asset is not income. It's after-acquired property — and it goes 100% to the trustee, not shared 50/50.

Sit with that for a second. Extra earnings above the threshold are split down the middle. A windfall is gone entirely. Someone who inherits $80,000 during bankruptcy doesn't keep half — they keep none of it, subject to the trustee's claim. That difference between "income" and "property" decides whether you share it or lose it, and it's exactly why a windfall landing mid-bankruptcy is a moment to get advice fast, not to spend.

Hardship — the pressure valve most people never ask for

If real costs are biting — essential medical expenses, necessary childcare, unusually high work-related travel — you can apply for a hardship variation to lift your threshold, which lowers what you pay. Trustees grant these more often than people expect. But only when you ask, and only with supporting evidence. Nobody comes looking to offer you one.

Why keeping your details current matters

Income contributions are calculated by formula, not by argument. The clients who have the smoothest run are the ones who keep their income details up to date and flag changes early — a new job, a pay rise, overtime, a bonus, a change in the family. Tell the trustee, they reassess, the instalments adjust, and there's no nasty surprise at reconciliation.

Go the other way — say nothing, provide nothing — and an assessment can still be issued on the information available. That usually means a higher contribution and payment pressure landing later, at the worst possible time. Early updates almost always make contributions easier to manage. It really is that simple: current information in, manageable number out.

Talk it through — before the next letter arrives

If any of this is sitting on your desk right now, the next move is a confidential strategy session. Phone or video, whichever suits you — we'll look at your whole position, tell you straight where you stand, and map the options while you still have them.

Book at resolvency.com.au or call 0457 099 099.

I'm not a liquidator or trustee — I work for you, not the creditors. In 36 years I've never once heard someone say they acted too early.

General information only — not financial, legal or tax advice. Everyone's position is different, so get advice specific to yours before you act.

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