You must use the right “number of people in your household” to qualify for Chapter 7. It’s not always obvious.
Our last blog post last week was about which state to use for the “means test” when you have connections to more than one state. The way you answer that question can be crucial for passing the “means test” and qualifying for Chapter 7 “straight bankruptcy.”
Same thing with the size of your family, as today’s blog post explains.
The Easiest Way to Pass the “Means Test”
As we’ve been saying, the easiest way to pass the ‘means test’ is for your family’s income to be no more than the published median family income amount for your family size in your state. Even if your income is higher, you might be able to pass the “means test” through a much more complicated and riskier method. But for today’s purposes we’re focusing on this most straightforward income-comparison method.
The Larger the Family the Larger the Median Family Income
Key to this income method is picking the right family size. As you might expect the larger the family, the higher the median family income amounts. This no doubt is in part because a “family” with only one person has only a single income earner, while one with two people potentially has 2 income earners, and so on average more income. Also, families with more children require more income, on average, to pay for the expenses of the additional children.
This is verified to be true for every single state if you take a look at the published median family income amounts provided by law (11 U.S.C. Section 101(39A)) by the U.S. Census Bureau. See this handy table of all of the states’ median family annual income amounts (effective starting April 1, 2016).
For example, in this table the median family income amounts in Utah are as follows, for families of:
- one person, $54,314
- two people, $59,972
- three people, $67,082
- four people, $75,777
- for each additional person, add $8,400
So, the larger you can truthfully and legally show that your family is, the more income you can have and still pass the “means test” by this most straightforward income method.
When Your Family Size is Unclear
These days less than half (46%) of children under 18 years old live in the “traditional” home of two married parents in their first marriage. In contrast 61% of children lived in such a home in 1980, and 73% did in 1960. So there are now lots more kids and step kids being raised in other circumstances: part-time in two different families, by single parents, by grandparents, and such.
So figuring out family size is a lot less simple than it used to be.
When in Doubt, What IS the Size of Your Family?
The simple answer to this question is: talk to the U.S. Trustee’s Office and to the IRS. Let us explain.
First of all, the answer is not to be found in the Bankruptcy Code. There is no definition of family or household size there.
Second, the U.S. Trustee Program is the arm of the U.S. Department of Justice that Congress tasked with enforcing the bankruptcy “means test.” As mentioned in the last blog post, the U.S. Trustee Program has put out a “Statement of [It’s] Position on Legal Issues Arising under the Chapter 7 Means Test.” As for family or household size, this Statement says:
- “Household size” is the debtor, debtor’s spouse, and any dependents that the debtor could claim under IRS dependency tests. The USTP uses the same IRS test for the definition of both “household” and “family.”
It then refers to the IRS Publication 501 for its definition of dependent.
And third, the IRS defines “dependent” (see page 11 of that Publication 501) as either a “qualifying child” or a “qualifying relative.” The IRS then spends thousands of words on 11 pages of triple-column fine print to explain its rules for those two terms. But fortunately for us here, the IRS also provides an overview of those rules.
To be a “qualifying child”:
1. The child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.
2. The child must be (a) under age 19 at the end of the year and younger than you (or your spouse if filing jointly), (b) under age 24 at the end of the year, a student, and younger than you (or your spouse if filing jointly), or (c) any age if permanently and totally disabled.
3. The child must have lived with you for more than half of the year.
4. The child must not have provided more than half of his or her own support for the year.
5. The child must not be filing a joint return for the year (unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid). If the child meets the rules to be a qualifying child of more than one person, only one person can actually treat the child as a qualifying child. See Qualifying Child of More Than One Person later [within Publication 501] to find out which person is the person entitled to claim the child as a qualifying child.
To be a “qualifying relative”:
1. The person can’t be your qualifying child or the qualifying child of any other taxpayer.
2. The person either (a) must be related to you in one of the ways listed under Relatives who don’t have to live with you, or (b) must live with you all year as a member of your household2 (and your relationship must not violate local law).
3. The person’s gross income for the year must be less than $4,000.
4. You must provide more than half of the person’s total support for the year.
One last twist—the U.S. Trustee’s Program’s Statement adds this:
The USTP departs from the IRS dependent test (as does the IRS when it determines family size for collection purposes) in cases justifying “reasonable exceptions” (e.g. a long standing economic unit of unmarried individuals and their children).
Determining family size sure isn’t so straightforward, is it?!