Not everyone qualifies to receive a debt discharge in Chapter 7 bankruptcy. You’ll determine whether your income is low enough by taking the means test.
The first step of the means test requires you to compare your income to the median income in your state for a household of the same size. Although counting the number of people in your household is usually straightforward, it can get tricky. In this article, you’ll learn about some of the factors you’ll consider when determining the correct household size.
(You’ll find more articles in The Bankruptcy Means Test area.)
The means test looks at the gross income of everyone in your household during the six months before you file. If your household income is below the median income in your state, you’ll qualify to file a Chapter 7 bankruptcy.
However, just because your income is above the median doesn’t mean that you’re precluded from Chapter 7 bankruptcy. You’ll be able to subtract expenses to determine whether you have enough disposable income (income left over after you pay your expenses) to repay all or part of your debt.
For instance, you’ll be able to deduct some actual expenses, such as taxes and child care, as well as some predetermined expense amounts for things like rent and utilities. The predetermined expense amounts help prevent people with extravagant lifestyles from taking advantage of Chapter 7 bankruptcy.
(Learn more about completing the means test in "Current Monthly Income" for the Bankruptcy Means Test.)
When filling out your official bankruptcy forms, you’ll include figures that you’ll find on other sites. For instance, the median income figures for your state appear on the Means Testing website page of U.S. Department of Justice.
You’ll notice that you’ll need to know how many people you can count on your means testing forms because the trustee lists median income figures by the number of people in the household. For instance, the median income for a household of one will be lower than for a family of six. The bigger your household size, the higher your income can be and still be below the state median income.
Unfortunately, neither Congress nor the courts provide hard and fast rules on what counts as a member of your household for purposes of using the state median income charts.
In figuring out who is part of your household, it helps to think of your household as a unit. Your household functions as an entity and the persons in it depend on you to provide support. You and your spouse, if you live together, are a household of two. You, your spouse, and your toddler are likely a household of three.
Issues arise, however, because households, especially in today’s economic conditions, are often not simple. Here are some examples of sticky issues.
Many courts use the Census Bureau definition of household, which is “all the people who occupy a housing unit as their usual place of residence.” Known as the “heads on beds” rule, this would include children or stepchildren even if they aren’t dependents on your tax return.
However, some courts will not count someone as a household member if that person isn’t a dependent for tax purposes.
What if you support your child who is in college and living away from home for most of the year? Or what if your children live with you part-time under a joint custody agreement?
If you pay a substantial portion of the expenses of children who live with you part-time, there’s a reasonable chance that they will count as part of your household. But, the court might not be inclined to erase a creditor’s debt so that you can support an adult capable of earning a living.
Because each situation is different, this article cannot provide an answer other than “it depends.” You’ll want to speak with a local attorney about the particulars of your case.
Consult with a bankruptcy lawyer if there’s some doubt as to whether a person counts as part of your household and counting that person would mean you qualify for a Chapter 7 discharge. A local bankruptcy attorney can tell you how the judges and trustees in your jurisdiction count members of households.
Want to learn more about bankruptcy? Check out the bankruptcy resource center.