If you are considering filing for bankruptcy, you have likely heard about the dreaded “Means Test.” It is a test under the new bankruptcy law you have to “pass” in order to qualify for Chapter 7 bankruptcy.

The way you can determine whether you pass is you look at your gross monthly income for the previous 6 months, divide the number by 6 and multiply by 12. Sounds fun! This is one of the many reasons getting an experienced bankruptcy attorney is advisable. You compare that number with the median income in your state. The median income varies depending on the size of the household. As you may guess, it goes up as the household goes up. If you are under the median income, that’s it. Your worries about the Means Test are over and it is likely that your attorney breathes a sigh of relief and you Chapter 7 bankruptcy is less costly. If you are over the median, your attorney will likely need to do more work and ask you more questions. In many cases, there will be nothing left, but to file a Chapter 13 or Chapter 11, which is more costly and in some cases infeasible and usually more complicated.

Let’s go back to the household size issue. Especially for people whose income is close to the median or over the median, determination of the number of people in the household is important, because it could mean a difference in qualifying for a Chapter 7 bankruptcy or not. In California, where I practice bankruptcy law, the current median income for 1 person is $49,182 and for 2 people it is $65,097. That is a big difference!

In some cases it is very clear what the household size is. A mother living with two minor daughters in one house. Father has passed away and no relatives/friends living with them. That is a clear household of 3.

However, some cases are not as clear, living with girlfriend who is currently in school, fiancé from another country, roommates, grandmother and her husband, adult child moving back in, gay unemployed partner and her adult child. What is the size of your household now? As you can see tell, some situations are less clear-cut and an argument can probably be made to include or exclude those people.

An experienced bankruptcy attorney will likely spot that issue right away, especially in situations where it is critical (you are above the median or close to it).

It is a bit of a balance for an attorney, because once you include the person as part of the household, you have to include their contribution to the household…As you may have guessed, while it helps to include people without income into your household, including income from people who make a lot more money may hurt your chance of qualifying.  Seeing the issue and making the right decision is important.

Household size

There are several approaches on to how to calculate this size of the household and no “right” answer, though most attorneys will argue that currently the controlling approach is the “heads on bed” approach. The name basically says it all, in that the household consists of heads on bed occupying the housing unit. In re Ellringer, 370 B.R. 905 (Bankr. D. Minn. 2007). This approach is also known as Census Bureau test.

A more limited approach is the “financial dependency” approach, which basically looks to the number of people debtor is financially responsible for within the household. A less followed approach is the “IRS regulation” approach, allowing household size to be controlled by the number claimed as dependents allowed under the IRS code.

The moral of the story is to know that there are options and to know that a decision on the size of household in case of Chapter 7 is made at time of filing, therefore, the timing of your case may be as important as anything else. Consulting with an experienced bankruptcy attorney will help you make the right decision for you.