Household Size and the Bankruptcy Means Test
The size of your household plays an important role in qualifying for Chapter 7 bankruptcy. Learn how to calculate yours.
If you want to qualify for Chapter 7 bankruptcy, you must pass the bankruptcy means test. Your household size plays an important role on the means test and can have a significant impact on whether or not you pass. Read on to learn more about the different approaches bankruptcy courts use to determine the size of your household and how it can affect your means test.
For more information on how to complete the bankruptcy means test, see our Chapter 7 Means Test topic area.
How Can Household Size Affect the Outcome of Your Means Test?
The means test looks at your average monthly income for the six calendar months prior to your bankruptcy and compares it with the median state income for a household of the same size. If your household income is less than your state median, you automatically pass the means test. If your income is greater than the state median, you must complete the remaining portions of the means test form and take into account your expenses to determine whether you qualify.
If your income is too high to pass the means test automatically, the means test allows you to deduct certain expenses from your income to determine whether or not you pass. But for some expenses, the means test only allows debtors to deduct predetermined amounts based on average IRS local and national expense standards.
Your household size can make a big difference on the means test because it determines:
- the median income figure the means test will compare your income against, and
- the amount of deductions you can claim for certain expenses.
In general, both state median income figures and allowable deduction amounts are larger for bigger households. This means that if two debtors have the same income, the debtor with the larger household will typically have an easier time passing the means test.
To find the most up-to-date IRS expense deductions and state median income figures, visit the U.S. Trustee’s website at www.justice.gov/ust and choose "Means Testing Information.”
Calculating Your Household Size
Because the Bankruptcy Code doesn’t define what a household is, bankruptcy courts use different approaches when determining a debtor’s household size on the means test. The following are the most common methods courts use to determine who is included in your household.
A minority of courts allow debtors to use the “heads-on-beds” approach when calculating household size. The heads-on-beds method uses the Census Bureau’s broad definition of a household which essentially includes all persons who live in your house. Most jurisdictions don’t follow the heads-on-beds approach because it doesn’t take into account the relationships between household members and tends to be overly broad.
IRS Dependency Standard
According to the IRS, your household includes only the people you can claim as dependents on your tax return. If you live in a jurisdiction that uses the IRS dependency standard, when calculating your household size on the means test you can typically only count the individuals you can claim as dependents on your taxes. But because of its restrictive nature, only a minority of courts use the IRS dependency approach to determining household size.
Economic Unit Approach
In general, the economic unit approach is the most common method courts use to determine your household size. This approach takes into account all individuals residing with you who act as an economic unit. This means that you can typically include a person who you support financially but may not be able to claim as a tax dependent.
Under the economic unit approach, when determining whether a person qualifies as a member of your household, courts look at the totality of your circumstances and may consider factors such as:
- the amount of financial support you provide to that person
- the amount of financial support you receive from that person
- whether you share your assets, income, or expenses
- whether you have any joint property or debts together, and
- any other ways you intermingle your finances.
What About Part-Time Household Members?
If a member of your household only lives with you part-time, whether you can include that person in your household size calculation depends on the rules in your jurisdiction. In most cases, courts consider factors such as:
- how often that person resides in your house, and
- the amount of financial support you provide the individual.
In a related case, the Fourth Circuit Court of Appeals recently used a fractional approach based on how many days out of the year the debtor’s children lived in the debtor’s house. With this approach, for example, if each of your two children lived with you and your wife 50% of the time, then you would have three members in your household (you + your spouse + 1/2 child + 1/2 child).
Some bankruptcy attorneys believe that this fractional approach is not supported by the Bankruptcy Code. If you are unsure about how to calculate your household size or which approach your jurisdiction uses, talk to a knowledgeable bankruptcy attorney in your area to learn more.