Household Size Affects Your Ability to Pass the “Means Test”

Whether you may file a Chapter 7 bankruptcy can depend on how many people are in your “household.” And that can depend on how the law defines that term. The more people you can consider to be in your “household” increases how much income you are allowed to have and how much in expenses you can claim, making it more likely that you can file a Chapter 7 case.

The “Means Test”

The “means test” is designed to require debtors who have the “means” to pay a meaningful amount to their creditors to do so. It does this mostly by preventing some debtors who want to do a Chapter 7 “straight bankruptcy” from doing so. Those debtors usually end up filing a 3-to-5-year Chapter 13 payment plan instead.

Chapter 13 can be a very good tool in the right circumstances, and can often be a very manageable second option. But you would probably not appreciate being effectively forced into such a lengthy and relatively expensive program when your circumstances are more appropriate for the 3-month or so Chapter 7 option. So it’s important to know if you can pass the “means test” and be allowed to file Chapter 7.

The test has a number of levels. You can pass it at any level. If you are successful in the first level, you pass the “means test” and do not need to go to the other levels.

Generally this “means test” gets more complicated at each level.  In this blog I’m covering only the first two levels, because most people pass one or the other. Household size mostly affects these two levels, the first as it affects your allowed income, the second as it affects your allowed expenses.

Income

Most people pass the “means test” at this first, income level. You pass simply if your income is no more than the “median family income” for households of your size within your state. The median income is based on a U.S. Census determination of that amount of income at which half of the families in the state have a higher income and half have a lower income. These amounts are regularly updated and published. The current median income amounts for California are as follows:

Notice how significantly these median income amounts increase as the number of people in the household increase. So it’s important to know how the law defines household.

Consider this example. If you wanted to file a Chapter 7 bankruptcy for yourself alone, and your household had a total income of $55,000 from all sources, and consisted of you and a live-in boyfriend or girlfriend, would this be a household of 1 or 2? If the law defined that household by some strict family definition of married adults plus any minor children, this would be a household of 1. But by a broader definition reflecting the number of people who actually lived together and were economically interconnected, this would be a household of 2. By the first definition your income would be higher than the median family income amount for a 1-person household. But by the second definition you would be under the median family income amount for a 2-person household. So under the first definition you would not pass the “means test,” at least not at this first level, but under the second definition you would pass it and qualify to file a Chapter 7 case.

So what does the law say about the right definition of “household”? Unfortunately, when Congress wrote the laws about this into the Bankruptcy Code in 2005, it did such a terrible job that seven years later the courts have barely even begun sorting this out. Different courts all over the country have come up with different definitions.

In Southern California the bankruptcy courts have generally used a “heads-on-beds” approach. This is a somewhat more liberal definition that looks at the reality of the household, how many people are actually living there, as in sleeping regularly under that roof. So in the above example-two adults living together with a combined income of $55,000, that would likely be seen as a household of two. So either of them could file a Chapter 7 case, since $55,000 is less than the current $63,481 median income amount for that size of household.

The other common issues about household size involve children who split their time between two households, as well as those who are no longer minors but live at home partially or completely dependent on their parents’ financial support. As long as they regularly spend time living in the household, and get a meaningful level of financial support within that household, these children can be counted as part of the household in determining whether a debtor is above or below the “median family income.”

Expenses

If, and only if, your income is higher than the “median family income” applicable to your household size, and you still want to file a Chapter 7 case, then you go through a detailed expense analysis to determine if you can pass the “means test” at this next level.

To do this you use your actual expenses for some expense categories but then for other categories you use standard expense amounts from data prepared by the IRS. Some of these categories of allowed expenses are applicable nationwide, while others are specific to each locality. You can also deduct expenses in the form of monthly payments on certain secured debts (mortgage, vehicle), and “priority claims” (income tax, support arrearage).

How much you may deduct for many of these expense categories, including the IRS ones for food, transportation, clothing and such, depend on family size. The more people there are in the household, the larger the allowed expense, resulting in less money left over.

After deducting all the allowed expenses from your monthly income, the amount left over is your “monthly disposable income.” If that amount is no more than $117, then you’ve passed this second, expense level of the “means test,” and you can still file Chapter 7.

But if your “monthly disposable income” is more than $195, then you can’t file under Chapter 7, at least not at this level of the “means test.”

And if your “monthly disposable income” is between $117 and $195, then multiply that amount by 60. If the resulting amount is less than 25% of amount of all of your regular unsecured debts (excluding “priority” debts like income taxes and support arrearage), then again you’ve passed the “means test.”

Conclusion

Most people wanting to file Chapter 7 pass the “means test” on the income level by making less than the applicable “median family income.” Others have low enough “monthly disposable income.” But if it isn’t obvious, even these first two levels of the “means test” have their twists and turns. The meaning of the term “household” is just one.  And if you don’t qualify for Chapter 7 at these first two levels, there are still more levels that are well beyond the scope of this blog. The honest conclusion is that applying the “means test” and qualifying for Chapter 7 is not a do-it-yourself project.