Calculating the debtor's "household size" under Chapter 13

In Johnson v. Zimmer, the U.S. Fourth Circuit Court of Appeals, in a 2-1 split decision, upheld the bankruptcy court's method of determining the debtor's "household size" using a fractional economic unit approach purposes of Chapter 13's means test.

Bankruptcy law provides a "means test" for determining a debtor's eligibility for relief under Chapter 7 (liquidation) or Chapter 13 (wage-earner repayment plan). In Chapter 13 cases, the debtor provides information regarding monthly income and expenses to determine the disposable income available for the debtor's unsecured creditors under the repayment plan.

Background and procedural history

In 2010, the debtor filed a voluntary petition for bankruptcy relief under Chapter 13. She claimed a household of seven members in her proposed Chapter 13 repayment plan by including each person who resided in the debtor's residence for any length of time within the previous six-month period, namely, herself, her husband, her two minor children, and her three step-children.

The debtor's ex-husband, who was one of the creditors, objected to the proposed plan. The ex-husband argued that the household size was overstated, which led to incorrect calculations of the debtor's monthly expenses and disposable income, leaving insufficient funds to make any payments on two unsecured loans for which the ex-husband was jointly liable.

The debtor and her ex-husband shared joint custody of two minor children and the debtor's current husband had joint custody of three children from his previous marriage.

The bankruptcy court applied an economic unit approach, which fractionalized the percentage of time that whole persons spent in the household, and arrived at a total of 2.59 children in the household full-time, which was then rounded up to three children, thus giving the debtor a five-person household consisting of the debtor, her current husband, and three children. As a result, the bankruptcy court denied confirmation of the proposed plan, but granted the debtor permission to amend the plan.

The Fourth Circuit granted the debtor permission to file an interlocutory appeal.

The Fourth Circuit's majority decision

The Fourth Circuit noted that the term "household" is not defined in the Bankruptcy Code, and that other bankruptcy courts have developed three different methods for calculating household size.

Some courts have applied a "heads-on-beds" method for determining household size. This method, which the debtor advocated, uses the broad definition of the term "household" that is applied by the Census Bureau. This method counts any persons occupying a housing unit without regard to relationship, financial contributions, or financial dependency.

Other courts have applied an "income tax dependent" method. This method, which neither party advocated, is based on the number of individuals which the debtor has or could include as dependents on her tax return.

A third approach taken by some courts, known as the "economic unit" method, calculates household size by counting individuals within the household acting as a single economic unit, including

  • Persons financially dependent on the debtor.
  • Persons providing financial support to the debtor.
  • Persons inter-mingling their income and expenses with that of the debtor.

The Fourth Circuit upheld the bankruptcy court's decision to use a fractional "economic unit" method, finding that it best implemented the purpose and intent of the Bankruptcy Code.

The dissent

In a dissenting opinion, one judge disagreed with the court's ruling breaking up the debtor's children and stepchildren into fractional units, stating that undefined statutory terms must be given their ordinary meaning, which does not include partial people.

Individuals facing bankruptcy are urged to consult with a competent attorney experienced in these matters to ensure that their legal rights are protected.