DETERMINATION OF HOUSEHOLD SIZE FOR MEANS TEST CALCULATION

The ‘means test’ calculates the disposable income of debtor’s household using the B22 form for Chapter 7 and Chapter 13. The purpose of the calculation is to determine debtor’s eligibility for bankruptcy relief. For instance, if debtor’s household consists of himself alone, his household size is one. If his annual income is over $48,000, in California, his household income is over the state median for a household of one. If he had a wife and 3 minor children, then his household size would be five and the relevant median income is about $86,000. In both cases, if the household income were below the state median, debtor would certainly qualify for Chapter 7 relief. If the household income were over the state median, debtor would have to ensure that he has enough eligible deductions to eliminate disposable income so that no presumption of abuse exists.

So, the household size is important to qualifying for bankruptcy relief because the bigger the size of the household, the bigger the eligible deductions. A single debtor with a household size of one and a gross income of $60,000 a year may end up in a Chapter 13 instead of a Chapter 7. But that same debtor’s household size was two, he would have no problem qualifying for a Chapter 7 because of a bigger household size. But how do you determine what the correct household size is? A debtor may have two adult children, one 27 years old who is a student and not working, another 28 years old who has part time employment making $500 a month but both still living with him in his house. If debtor files for Chapter 7 relief and claims that his household size is three because he has two children who still live with him, albeit adults, and the trustee objects to his claim of household size saying that his household size is only two excluding the 28 year old who has part time income, then who is correct? Is debtor’s household size three or two? If his household size is three he would be eligible for Chapter 7 relief, but if it were two, his case would have to be converted to Chapter 13 and he would have to pay a portion his debts of 36 to 60 months.

In Re Gaboury, the Chapter 13 debtors had two adult children who lived with them. Their son was 27 years old. He was “employed sporadically.” Aside from providing a roof over his head, the debtors provided little additional financial support for him. He also provided little financial support to the family. Their daughter was 23 years old. She was a full-time student. Debtors calculated the ‘means test’ based on a four-person household. The trustee objected to confirmation on the basis that the debtors’ household should exclude the adult children. In other words, the trustee argued that their household size should only be two, not four. The trustee asserted that the proper test for determining the size of a debtor’s household for the purposes of completing the ‘means test’ should be based upon the totality of the debtors’ circumstances, which is known as the ‘Economic Unit’ approach. The debtors, on the other hand, relied on either the Bureau of Census definition of “household,” which is the “heads on beds” approach, or the Internal Revenue Service practice of counting the number of dependents according to certain Internal Revenue Code regulations.

 The court adopted the “Economic Unit” test, noting that, “the objective of the Means Test are completely unrelated to the functions of either the Census Bureau or the IRS” and that, “neither the Census Bureau nor the IRS deal with projected disposable income, and unlike the Court, neither is charged with adjudicating the interests of bankruptcy debtors and creditors.” In contrast, the ‘Economic Unit’ approach strives to determine, case by case, which people living in the same household constitutes an economic entity. The court concluded that the debtors’ household included their daughter, but not their son.
Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.