What happens to your income during bankruptcy?

There are plenty of misconceptions about bankruptcy – not least of which is what happens to your income during bankruptcy.

Your income will be assessed each year for the period of your bankruptcy but, contrary to popular belief, there is no limit to what you can earn during bankruptcy.

However, if your net income exceeds the relevant income threshold, you will need to pay half of the amount you earn over that threshold to your trustees.

Some other important questions are answered below…

What is classed as ‘income’ during bankruptcy?

You may think that ‘income’ is classed as any money that you receive in your hand from an employer during bankruptcy.

While that is, of course, included, there’s a whole raft of other things that are considered ‘income’ under Section 139L of the Bankruptcy Act.

Don’t let the following catch you out – they are all classed as income:

  • Fringe benefits: the use of a motor vehicle (whether provided by an employer or other party), rental payments by your spouse, etc.
  • Super that is an annuity or pension (e.g. regular weekly payments from your super fund). NOTE: Lump sum draw-downs/payments from your super fund DO NOT constitute income, assuming the draw-downs are irregular(e.g. once a year).
  • Most Centrelink benefits.
  • A loan received from an associated entity: this is to prevent bankrupts from taking their wage as a loan, if employed by a related entity.
  • Money received by someone else for your work: you can’t simply direct invoices/wages to be paid to your spouse to avoid earning any ‘income’.
  • Any form of salary sacrifice: usually voluntary super contributions.

How much income can you earn during bankruptcy?

While there is no limit to how much you can earn, AFSA sets out income threshold amounts that increase twice yearly and over which you must pay half of your income to your trustees.

The thresholds are currently (net per annum):

  • No dependants – $55,837.60
  • 1 dependant – $65,888.37
  • 2 dependants – $70,913.75
  • 3 dependants – $73,705.63
  • 4 dependants – $74,822.38
  • 5 or more – $75,939.14

For Bankruptcy Act purposes, a dependant is defined as someone:

  • Who resides with the bankrupt;
  • Who is wholly or partially dependent on you for economic support; and
  • Whose income is less than a certain indexed amount (currently $3,581).

When you earn over the threshold…

If you earn over the relevant threshold, you must pay to your trustee half of the difference between the threshold and what you earn.

This amount can be paid over time. A trustee should not require you to pay more than 25 percent of your weekly or fortnightly income to them for income contributions.


You earn $65,837.60 net for the first year of bankruptcy and have no dependants. You are therefore $10,000 over the relevant threshold. You will need to pay $5,000 to your bankruptcy trustee. This $5,000 should be paid during your first year of bankruptcy by weekly/fortnightly contributions.

What if you’re unhappy with your income assessments?

If you think the trustee has made an error with your income assessment, there are two main ways to review the assessment:

  • Request the Inspector-General to review the assessment; or
  • If you have requested the Inspector-General to review the decision and you do not agree with his/her determination, you may then lodge an appeal to the Administrative Appeals Tribunal.

If you request a review by the Inspector-General, you must:

  • Submit the request in writing to the AFSA not later than 60 days after the day on which you were notified of the trustee’s assessment;
  • Accompany the request with a copy of the notice of assessment and documents that support your request.

You will be notified within 60 days of receipt of your request of the Inspector-General’s decision. If you receive no response in that time, the assessment is deemed to be confirmed.

If you think the amounts you’re required to pay weekly/fortnightly are too much, you can apply for hardship. The following factors are relevant to a hardship request:

  • You or a dependant suffers from an illness.
  • You have to pay child day care to continue to work (i.e. your child needs to be in day care so you can go to work).
  • You incur substantial expense to travel to and from work.
  • Your spouse, who normally contributes to the household income, has become unable to do so (i.e. through illness).

A hardship application must be submitted to the trustee directly with evidence of the grounds on which you are seeking hardship.

Watch out for this common mistake …

It is common for bankrupts employed by a related company to artificially lower their wages to try and avoid paying income contributions.

While this may seem fantastically clever, trustees have some pretty broad powers to get around this tactic.

Under Section 139E of the Act, a trustee can apply to court seeking various orders in circumstances where:

  • A bankrupt has supplied personal services to or on behalf of an entity that they controlled; and
  • The bankrupt received no remuneration for those services; or
  • The bankrupt received substantially less remuneration than someone in a like position would have expected to receive from an arm’s length entity.

Under Section 139Y of the Act, a trustee can determine a bankrupt to have received reasonable remuneration when:

  • The bankrupt is engaging or has engaged in employment or work; and
  • The bankrupt did not receive any remuneration in respect of this work or the remuneration received was less than a relevant award or was less than a reasonable person would expect if they performed similar work at arm’s length.

For instance, if you’re a CEO and are paid the same as the cleaners, the trustee can determine you to have earned an amount that a CEO should have earned, despite the fact you did not receive such remuneration during the bankruptcy.

The moral of this story? Don’t try and lower your income to avoid paying income contributions because a trustee will find out!

If you are facing bankruptcy or currently bankrupt and are unsure how it will affect your income, get in touch on 1300 906 966 or chat to us via the live chat window on our site.

We can assist you with all aspects of  bankruptcy – including submitting a request to the Inspector General or the trustee to review the basis of your income assessments or request hardship.

Posted on 23-03-18 in Bankruptcy Assistance.