In the first step of the means test, you compare your income to the median income in your state for a household of the same size. Using the correct household size is important, but sometimes can be tricky to determine.
If you file for Chapter 7 bankruptcy, you must take the “means test” -- a series of calculations used by the court to determine whether you qualify to file a Chapter 7 bankruptcy, based on your income during the six months before you file. If your household income is below the median income in your state, you qualify to file a Chapter 7 bankruptcy. Period.
If your income is above the median income, you must perform further calculations to determines whether you have enough disposable income (income left over after you pay your expenses) to repay all or part of your debt.
(To learn more, see our Chapter 7 Eligibility & Means Test area.)
Household size is an important factor in the means test because median incomes are listed by the number of people in the household. For example, 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.
You can find the median income figures for your state on the website of the U.S. Department of Justice at www.justice.gov/ust/eo/bapcpa/meanstesting.htm.
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 on 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.” This would include children or stepchildren even if they are not dependents on your tax return. However, some United Trustees have refused to count as a household member someone who is not a dependent of the debtor 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 substantial expense for your children who live with you part-time, they will probably count as part of your household.
If there’s some doubt as to where a person counts as part of your household, and counting that person would mean your income would be below the state median income (and therefore you pass the means test without having to do further calculations), then it might make sense to consult with an attorney. A local bankruptcy attorney can tell you how the judges and trustees in your jurisdiction view members of households.
Want to learn more about bankruptcy? Check out our bankruptcy resource center.