You can file for Chapter 7 bankruptcy if you live with your parents, regardless of whether you support yourself or rely on your parents for financial support. The tricky issue, however, is passing a financial test called the "means test." The test will require you to account for your living arrangements and possibly, disclose your parents' financial information, too.
Even though debtors (people who file bankruptcy cases) have to provide detailed financial information on their bankruptcy paperwork, a court can still struggle to determine the debtor's actual financial picture. For instance, the finances for someone who lives alone on a $40,000 salary would look a lot different from someone supporting a spouse, children, and aging parents on $40,000 per year.
Since 2005, the bankruptcy code has required that debtors pass a "means test" to determine whether the debtor has enough resources to make a meaningful payment to unsecured creditors (like credit card and medical debt). By comparing income and expenses, the means test tells the court if the debtor has any money left over with which to make a monthly payment in a Chapter 13 case. If you don't have enough disposable income to make a Chapter 13 payment, you qualify for Chapter 7 bankruptcy.
So how do your parents figure into the equation? You might fail the test if the court counts you and your parents as a household and requires you to include your parents' income in the calculation.
The first step in the means test compares your household income to the median family income for your state. The median income varies according to your household size. It also requires that you disclose your household's expenses (some aren't your actual costs, but rather predetermined amounts). In either case, your household size determines how much you're allowed to deduct.
The means test, which is not a very flexible formula, assumes that a household is either an individual or a family unit that pools its income and expenses. That's fine for a traditional family, but instead, you could be:
The bankruptcy code provides little guidance on how to determine the number of individuals in a household, and the courts have struggled to come up with a workable formula. Most adopt one of three approaches.
The Census Bureau definition of household includes "all the people who occupy a housing unit as their usual place of residence." When the court applies this definition, you'll count everyone in the household regardless of relationship or contributions. When the household is made up of some combination of individuals other than a nuclear family, this approach tends to inflate its size falsely.
According to the IRS, household size is the debtor, debtor's spouse, and any dependents that the debtor could claim under IRS dependency tests. Under this approach, your household is limited to only the individuals you can claim on your tax returns no matter how much financial support you give or receive from others in the household.
This method looks at a household as an economic unit, in which the members have closely intertwined finances and dependencies. It also recognizes that more than one economic unit could share living arrangements and provide different types and amounts of support for one another.
If you are unemployed and financially dependent on your parents, the court would consider the three of you members of one household regardless of the approach and expect you to disclose your parents' income and expenses.
On the other hand, if you live with your parents and pay rent, but don't rely on your parents for financial support, the court would consider you a self-contained household of one under either the dependent approach or the economic unit approach. On the means test, you would report only your income and expenses. Under the Census Bureau definition, you'd be three members of the same household, all of whom would have to disclose income and expenses.
Because courts apply the law differently, the only way to know what you, and perhaps your parents, can expect is to consult a qualified consumer bankruptcy lawyer in your area.
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