Most sections of the bankruptcy means test focuses on your income and expenses. But one of the most important calculations you must make on the means test is actually your household size. If you determine your household size incorrectly, it can make the difference between passing and failing the means test. Read on to learn more about how to calculate your household size on the means test.
The first part of the means test compares your average income during the six-month period preceding your bankruptcy with the median income of a same size household in your state. If your income falls below the median, you automatically pass the means test without having to complete the rest of the form.
As you might expect, state median incomes increase as the household size gets bigger. For example, the median income for a family of four is typically greater than a single-person household. This means that you can have a higher income but still pass the means test automatically if your household size is big enough to leave you below the state median.
If your income is above the state median, you must complete the entire means test form and use your expenses to pass it. For many types of expenses (such as food, rent, and utilities), the means test only allows you to deduct predetermined amounts based on IRS local and national standards (not your actual expenses). But these deductions also increase with household size. In general, if you have a larger household than another debtor with similar income, you will have a better chance of passing the means test than the other debtor.
Unfortunately, bankruptcy laws don’t define what constitutes a household. As a result, courts have differing opinions on who debtors can count as members of their household. The following are the most common approaches courts use when determining household size. But if you are not sure which method your jurisdiction follows, consider talking to a knowledgeable bankruptcy attorney in your area to learn more.
The “heads-on-beds” approach follows the Census Bureau’s definition of a household which includes everyone who lives in your house. Because the heads-on-beds approach doesn’t take into account financial contributions or relationships between household members, most courts believe that it’s too broad and inaccurately inflates household size. As a result, only a minority of courts use this approach.
When determining household size, some courts only allow debtors to count individuals they can claim as dependents on their tax return. In general, this is the most restrictive approach because it doesn’t allow debtors to claim a person who lives in their house unless they can include him or her on their tax return as a dependent.
Many courts use the economic unit approach when figuring out household size on the bankruptcy means test. This method essentially looks at how many people in your household act as a single economic unit. The economic unit approach generally allows debtors to count any individuals living in their home they financially support, depend on, or whose finances are closely intermingled with their own.
If you have children or other individuals who live with you for only part of the year (maybe because of a divorce or custody agreement), whether you can count them as members of your household typically depends on the rules in your jurisdiction. Many courts consider factors such as the amount of time they live in your house and how much financial support you provide when making the final determination.
Recently, the 4th Circuit Court of Appeals approved a fractional approach based on the amount of time children live with the debtor. In that case, the court divided the number of days each child lived in the debtor’s house during the year by 365 to come up with a fraction. The court then added the fractions for each of the children to calculate the debtor’s household size.