Child Support and Bankruptcy: 7 Key Points You Need to Know

If you are considering declaring bankruptcy and are currently paying child support, it is vital to understand how child support and bankruptcy interact and what your ongoing responsibilities are.

When people are in dire financial straits and can no longer meet their financial commitments, bankruptcy may be the only option to clear their debts.

When the person declaring bankruptcy (a debtor) has children, they must consider their child support responsibilities, other financial commitments, and debts.

While the debtor will have ongoing child support payments, they might also be in arrears of child support payments when they become bankrupt.

In this case, they will either need to make an arrangement with Services Australia to pay back the debt or make a private, legally binding arrangement with their ex.

Services Australia (previously Centrelink) is responsible for administering Australia’s child support assessment scheme.

Generally, your financial obligations regarding child support payments will be determined by looking at two factors.

• Firstly, your previous year’s tax return will be used to estimate your income for the upcoming year. Ensuring you lodge accurate, up-to-date tax returns will ensure your child support payments are proportional to your actual income and you don’t end up paying more than your fair share.
• Secondly, Services Australia will look at the division of care between the children’s parents or guardians.

The Bankruptcy Act 1966 contains specific provisions for when a child’s parent or legal guardian becomes bankrupt in Australia. The aim of these is to protect the rights of a child to receive ongoing financial support.

Also read: Is Child Support Taxable Income in Australia? Unravelling the Facts

What Happens to the Child Support Agreement Once a Parent Declares Bankruptcy?

When a parent declares bankruptcy, the child support agreement remains largely unaffected. Here’s what you need to know:

1. Declaring bankruptcy does not terminate or reduce the parent’s obligation to pay ongoing child support. Current and future child support payments must continue as set out in the agreement or as determined by the Child Support Agency (CSA).
2. Any child support arrears (past unpaid child support) that exist at the time of bankruptcy are not wiped out. The bankrupt parent remains liable for these arrears.
3. If a parent owing child support declares bankruptcy, the CSA can make a claim against the parent’s bankrupt estate for any unpaid child support. This debt is often treated as a priority over other unsecured debts.
4. While the bankruptcy itself doesn’t alter the child support agreement, a significant change in financial circumstances (which might accompany bankruptcy) could be grounds for the parent to seek a review of their child support payments. However, this is not automatic, and the parent would need to provide evidence of the change in circumstances.

Also read: Child Support After 18

Are Child Support Arrears Treated Differently Than Other Debts in Bankruptcy?

Yes, child support arrears in Australia are treated differently than most other debts during bankruptcy.

Child support obligations hold a distinct status during bankruptcy.

Unlike some debts, child support arrears aren’t discharged by bankruptcy; they remain payable. These obligations are considered a priority, meaning they’re addressed before many other unsecured debts. 

Many people who file for bankruptcy mistakenly believe they will be released from all their debts, including child support debt.

If there is proof you have child support liabilities, this debt is treated differently than most other debts under the Bankruptcy Act.

Section 58 (5A) of the Bankruptcy Act 1966 provides that:

Nothing in this section (58) shall be taken to prevent the creditor from enforcing any remedy against a bankrupt or against any property of the bankrupt that is not vested in the Trustee of the bankrupt in respect of any liability of the bankrupt under:

• A maintenance agreement.
• A maintenance order.
• Regardless of their current financial status, any person declared bankrupt can be pursued for child support debt.
• You must also continue paying ongoing maintenance per your current income and childcare arrangements.

Even in bankruptcy, regular, ongoing child support payments must continue.

While certain assets may be protected in bankruptcy, these protections don’t generally shield against unpaid child support claims by the Child Support Agency (CSA).

What Should a Creditor Parent Do If the Debtor Parent Declares Bankruptcy?

If a debtor parent in Australia declares bankruptcy, the creditor parent (the one receiving child support) should consider the following steps:

1. Stay informed. Confirm the bankruptcy declaration. You can access the National Personal Insolvency Index (NPII).
2. Contact the CSA: Notify the Child Support Agency (CSA) about the debtor parent’s bankruptcy. They can guide on the implications for child support payments.
3. Lodge a Claim: If there are child support arrears, the creditor parent can lodge a claim against the debtor parent’s bankrupt estate. Remember, child support arrears are treated as a priority in bankruptcy.
4. Seek Legal Counsel: Consider consulting a legal professional to understand your rights and any potential changes in the child support arrangements.
5. Open Communication: If possible, maintain an open dialogue with the debtor parent. They may be willing to negotiate a modified payment arrangement post-bankruptcy.

In summary, while a debtor parent’s bankruptcy can pose challenges, the creditor parent needs to be proactive, informed, and seek appropriate support to ensure the child’s welfare remains prioritised.

Can Bankruptcy Affect Future Child Support Calculations?

Yes, bankruptcy can influence future child support calculations. A parent declaring bankruptcy indicates a substantial change in their financial circumstances.

Since child support calculations are based on parents’ incomes and overall financial situations, bankruptcy can affect the assessment.

1. Reassessment of Payments: The debtor parent can apply to the Child Support Agency (CSA) to reassess their child support obligations, citing the change in their financial status due to bankruptcy.
2. Evaluation of Income: Bankruptcy can alter a parent’s income through job loss or a change in financial circumstances. The CSA will consider this new income level when recalculating child support obligations.
3. Consideration of Assets: While certain assets might be protected or relinquished in bankruptcy, the CSA will still consider the overall asset position of the parent when determining child support.
4. Potential for Variations: If the bankruptcy causes significant hardship, the debtor parent can seek a change to the child support arrangement. However, any variation needs to be in the child’s best interests.

Is It Possible to Modify Child Support Agreements Post-Bankruptcy?

Yes, it is possible to modify child support agreements post-bankruptcy. Bankruptcy signifies a significant change in a parent’s financial circumstances, which can be grounds for reviewing child support arrangements:

• Application for Reassessment: The parent who has declared bankruptcy can apply to the Child Support Agency (CSA) to reassess their child support obligations, referencing their altered financial situation due to bankruptcy.
• Best Interests of the Child: Any modifications to child support agreements must always prioritise the child’s best interests.
• Negotiation: Parents can mutually negotiate and reach a new agreement if both parties agree on the changes. This new agreement can then be formalised through the appropriate legal channels.
• Legal Advice: Parents should consult legal professionals when considering modifications to ensure that all aspects are correctly addressed and the child’s needs are met.

In summary, while bankruptcy can provide grounds for reviewing child support obligations, the overarching principle is to ensure the child’s welfare and needs remain at the forefront of any modifications.

How Long After Bankruptcy Can Child Support Claims Be Made?

There’s no specific time limit post-bankruptcy within which the creditor parent must claim child support arrears. The obligation persists until it’s fully met.

Navigating Child Support and Bankruptcy Challenges?

Are you trying to balance the complexities of bankruptcy with your child support obligations? The intricacies of both can be daunting. Let Justice Family Lawyers guide you through the legal maze, ensuring the best outcomes for you and your child. Speak with our experts today and put your concerns to rest.