Your household size could determine whether you qualify for Chapter 7 bankruptcy. For some people, it is easy to determine household size. However, what is your household size when you live with extended family members, roommates, or other people? In those situations, it can help to understand how the bankruptcy court defines “household size” for a bankruptcy case.
Chapter 7 bankruptcy is intended for people who cannot afford to pay their bills. They do not have enough income to pay living expenses and their debts. Their net income each month is either negative or very low.
When Congress passed bankruptcy reform laws in 2005, they included a Means Test. The Means Test using your income from the six months before filing bankruptcy to determine your average monthly income.
If your income is below the average income for a household of your size in your state, you “pass the Means Test” to qualify for a bankruptcy discharge under Chapter 7. If not, you must complete another section of the Means Test to calculate your disposable income.
Your monthly disposable income is how much money you have left over each month after paying living expenses. Your disposable income is the amount you can afford to pay toward your debt. If your disposable income is negative or below a certain amount, you can still qualify for a bankruptcy discharge under Chapter 7.
However, if your income is too high, you cannot discharge your debt in Chapter 7. Instead, you need to file a Chapter 13 repayment plan. Most Chapter 13 cases require a 60-month repayment plan, but some debtors qualify for a 36-month Chapter 13 bankruptcy plan.
Your household size determines the median income for the Means Test. As your household size increases, the median income increases. Therefore, a household of four people can qualify for Chapter 7 with a higher income than a household of two people. The income to qualify for Chapter7 increases as household size increases because it costs more to support a family of four than to support a family of two.
Because you can count each person in your household for expenses, you must count their income. Income for the Means Test includes all household income, even if the other members of your family do not file bankruptcy. Therefore, if you file an individual Chapter 7 case without your spouse, you must still include your spouse’s income in the calculations for the Means Test.
Therefore, determining how many people are in your household becomes a critical factor in whether you qualify for Chapter 7 or Chapter 13.
Unfortunately, Congress did not include specific requirements for determining household size. As a result, the courts decide cases based on the facts of the case.
If you are married with two children, your household size should be four. However, suppose your mother lives with you, then your household size would be five. Many bankruptcy jurisdictions use the “heads in beds” method to calculate household size. Therefore, if someone lives in your home, you are required to include them in the household size and include their income in the Means Test.
However, the situation can become complicated when you have a roommate contributing to expenses. Generally, if you can prove the person only contributes to expenses, you should not need to income the person’s income in the Means test. However, you may need to include the money they contribute toward expenses on the Means Test.
Adult children can also pose a problem when determining household size. For example, suppose your child is over 18 years old, has a job, and still lives at home. An argument could be made that the child does not count as a household member because they support themselves. However, what if counting your child helps you qualify for Chapter 7 because it increases your household size and the median income level? In that case, you may need to count the child’s income on your Means Test.
Another common issue is how to count a child who lives in your home part-time. Joint custody can mean that a child lives with you about 50% of the time. Is that child countable as part of your household income? It could depend on who claims the child on their taxes and how child support payments are paid.
If you have any doubts about your household size, it is best to seek legal advice. Most Chapter 7 bankruptcy lawyers offer free consultations. Ascend can help you locate a bankruptcy attorney near you.
At Ascend, we help people find an affordable way out of debt. Our free bankruptcy calculators help you estimate whether you qualify for Chapter 7 or Chapter 13. In addition, we offer free debt evaluations to help you decide whether bankruptcy, debt management, or debt payoff planning is the best way for you to get out of debt.
Contact us today to get started. A member of our team works with you to find a solution to your debt problem that works for you.