N.D. Texas court finds Household size for purposes of means test should be economic unit
In a detailed opinion from Judge Larson in the Bankruptcy Court for the Northern District of Texas the court found that in determining household size for purposes of a chapter 13 case, the appropriate test is the economic unit approach. In re Poole, 2022 Bankr. LEXIS 2776, 2022 WL 5224087, Case No 21-32224 (Bankr. N.D. Tex, 30 Sept. 2022). As of the filing of the Pooles’ bankruptcy seven individuals were living in their home: the joint debtors, Mrs. Poole’s mother, and sister, a nephew (age 12) and niece (age 21) and the debtor’s adult son who was recovering from surgery and unable to work. The niece is a college student and also works 30 hours/week. Mrs. Poole’s mother earns $700/month social security. Mr. Poole’s sister recently obtained new employment. Thus these individuals helped contribute toward household expenses.
Debtors claimed a household of seven based on the heads on bed approach. The trustee objected asserting that the economic unit approach would exclude the niece and allow only a household of six. While not ruling on whether the niece should be included in the economic unit approach, Judge Larson went into some detail as to the alternative approaches to interpreting 11 U.S.C. §1325(b)(3)’s household size, as required to complete the means test. Such interpretation is critical, both to compute how much has to be paid to unsecured creditors under §1325(b)(3), but also whether the plan is required to extend to five years if it does not pay unsecured creditors in full per §1325(b)(4).
The three tests for determining household size is the heads on beds approach, the income tax dependent approach, and the economic unit approach. The heads on beds approach simply follows the household definition from the Census Bureau, the number of individuals occupying a housing unit. Support for this approach may be found in the fact that §1325(b) references the Census Bureau’s median income table, but nothing in §1325(b) incorporates the Census Bureau’s definition. Judge Larson found that this approach may over-estimate the household size, possibly including individuals transiently in the home without support from the debtors.
The income tax dependent approach examines who could be claimed as a dependent on the debtor’s tax returns. Judge Larson found that this would tend to undercount the individuals in the household. The Internal Revenue Code narrowly defines who may be a member of the household on a tax return, setting specific requirements for dependency. Part of the confusion on this issue is the use of the term household under §1325(b)(2) and the term ‘dependent of the debtor’ under §707(b)(2). Some courts have found that as both sections are part of a singular calculation, the terms must be read consistently. Judge Larson rejected this argument, finding it did not provide a consistent approach. The purpose of the Bankruptcy Code is not the same as the Internal Revenue Code, which is intended to collect revenue for the government. The bankruptcy Code seeks an accurate assessment of a debtor’s financial situation and thus what a debtor can feasibly pay over time to the creditors.1 Courts often see debtors who financially support others despite being unable to claim them as dependents on tax returns. Ignoring this economic realty would be incongruent with the rehabilitative purpose of the Bankruptcy Code.
The economic unit approach assesses the number of individuals in the household who act as a single economic unit. This considers 1) who is financially dependent on the debtor, 2) who financially supports the debtor, and 3) whose income and expenses intermingle with the debtor’s. This is the most flexible approach, allowing courts to adapt to each debtor’s individual circumstances, though could result in a fractional number.
An example of this approach is found in the Robinson2 case where the debtor’s four children spent 4 days/week with the debtor and three with their mothers. Debtor provided for certain expenses for the children as well as child support. Despite substantial contributions toward the children’s expenses, he could not claim them as dependents on his tax returns, but counting all of them in the household per the heads on beds approach would have over estimated his household given the sharing of their expenses with the mothers.
These cases show the need for courts to have flexibility in their approach to household size. The court sustained the trustee’s objection in finding that the economic unit approach was the proper test in determining household size, but requested that the debtor and trustee determine the household size based on the economic unit approach.
1 Johnson v. Zimmer, 686 F.3d 224, 239 (4th Cir., 2012).↩
2 In re Robinson, 449 B.R. 473, 475-82 (Bankr. E.D. Va., 2011).↩
Michael Barnett, PA