Household & Household Income – Determining whether to file Chapter 7 or 13 Bankruptcy
When preparing to file a bankruptcy for individuals the size of a household is used to determine the total amount of gross income allowable within a debtor’s household in deciding whether the debtor can file a Chapter 7 or Chapter 13. In other words, under Bankruptcy law one cannot simply choose what chapter they wish to file. A “means test” is utilized to determine whether one has the means, by way of income, to pay at least a portion of their debt through a payment plan under chapter 13. If the gross amount of household income is less than a certain amount, as determined by household size, then one may file a chapter 7 which eliminates all unsecured debt and potentially a portion of secured debt.
The current gross income allowable for one household member in Florida is $42,053 annual; for two, $51,299; three, $54,508; four, $64,722; five, $72,222; and six $79,722. For each additional member over six add $7,500. This is subject to change every year depending on economic conditions through the use of the Consumer Price Index.
Household income includes all members even if they are not part of the bankruptcy filing. Therefore, when only one spouse files a bankruptcy the income of both spouses are included, assuming they reside in the same house. The rationale for this inclusion was to ensure that the reality of the financial status of the debtor was recognized. For example, it would be considered unfair for a spouse who lost their job to file bankruptcy when the other spouse is employed earning in excess of their allowable amount of gross income. The household would still have the means to pay some of their creditors despite the misfortune of one of its members.
Another consideration is the fact that while the annualized amount makes for quick analysis the issue gets a little more complicated. The determination of annualized income is actually based on a six month look back from the petition filing. This will factor in a situation where someone has recently obtained employment but has been out of work significantly in the past and still will be unable to handle their debt load; and encompasses a fair amount on average for those self employed.
The definition of “household member” is critical to properly apply the means test calculation. The courts have confused matters by developing three different standards for application in determining the correct number: the “heads on beds” approach; the “IRS dependency” definition; and the “economic unit” method. Does a divorced parent who pays most of the support for their minor children get to claim the children as household members even if the children reside less than half the year with that parent? Do two spouses filing a joint bankruptcy get to add a young adult, who is not a child of the debtors, as a member when they could show the non-family member lived with the debtors while attending school full time? Courts have answered affirmatively to both questions but these issues remain unsettled until more definition is provided by appellate courts.
Once a potential debtor in bankruptcy makes the initial determination that they are not eligible for a chapter 7 by the test of applying their household income to the gross income criteria (referred as the “short form test”) the analysis does not stop. The “long form test” takes into account various expenses a debtor is presumed to incur for housing, groceries, and transportation, then adds actual allowable expenses for certain insurance, taxes, day care and other items. Then the court will consider 25% of the total unsecured amount of debt to see if the debtors could have a viable Chapter 13 plan.
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