Means Testing: How many people live in your house?

If you are trying to determine what kind of bankruptcy relief you qualify for, figuring out how many people live in your house can make a world of difference. The lawmakers have unfortunately made this a difficult question to answer. And a recent decision by the Fourth Circuit Court of Appeals has further complicated the issue.

First, some background. Regular folks filing for bankruptcy protection -- meaning people with primarily consumer debts like credit cards, medical bills, car loans and mortgages -- have to submit to "means testing" to qualify for relief. The means test compares your household income over a recent time period with the median income levels in your State for your household size. There are plenty of complexities in the income calculation (which is just one reason why it is essential to have the assistance of a competent bankruptcy attorney when running the test).

But the household size part of the calculation should be easy, right? If you live alone then your household size is one. And if you are married and have two kids then your household size is four, right? Unfortunately, it's often not that simple.

The biggest problem is that the bankruptcy laws passed by Congress do not define what "household size" means. They've essentially left it to the courts to figure that one out. There are three ways that courts have calculated the household size in a bankruptcy case: (1) The "income tax dependent" approach where the court looks at how many dependents are claimed on the filer's tax return (which can be problematic after a divorce where one spouse has custody but the parents agree to split or alternate the tax dependent claims for the kids), (2) the "heads on a bed" approach where the court simply counts how many people live and sleep in the home, and (3) the more complex "economic unit" approach which attempts to add up the people in the home who are a factor in the household economy.

Minnesota cases filed since the means test went into effect have largely followed the "heads on a bed" approach. The test has the advantage of being relatively simple: if grandchild lives with you or if you have a renter that shares your home, you count those people as part of your household size.

But until we have nationwide agreement or a Supreme Court decision resolving the issue, bankruptcy filers should be aware of the risks of relying on "heads on a bed" counting method. The Fourth Circuit Court of Appeals, in a case that was filed in North Carolina, adopted a very complex "economic unit" approach where they calculated exactly how long each person lived in the home. In that case, there were children and stepchildren who did not live in the house year-round. The calculation only counted a fraction of each child to determine the "household size," which meant that the bankruptcy filer ended up flunking the means test.

Commentators have already criticized the complexity of the court's calculations in that case. But if you live in Minnesota, the important thing to take away from the decision is knowing that "household size" is not a settled issue and you cannot necessarily rely on the "heads on a bed" counting method. Laws and their interpretations change and this is an unsettled area. Having an experienced bankruptcy attorney go over these issues for you is your best bet, particularly when courts cannot agree on how to count up the number of people in your household.

About the author: Dan Cooke