Writing an opinion that reads like a law review article, Bankruptcy Judge Michelle V. Larson of Dallas decided that the so-called economic unit approach is the best method for deciding the size of a “household” in a chapter 13 case. She said it “aligns with the purpose and statutory language of the Bankruptcy Code.”
A couple in chapter 13 were a modern family. Seven members of the extended family lived in the home full time or part time. Not all were solely dependent on the debtors. Some had income of their own, to a limited degree.
The debtor claimed there were seven in their household. The chapter 13 trustee objected, claiming there were only six.
Why does it matter?
As Judge Larson explained in her September 7 opinion, the size of the household can affect the debtors’ median income and whether they are obliged to submit a five-year plan rather than a three-year plan.
In detail, Judge Larson described the three principal methods for determining the size of a household: (1) the heads on beds approach; (2) the income tax dependent approach, and (3) the economic unit approach. She said that heads on beds overcounts the size of the household, while the income tax dependent approach undercounts.
Describing heads on beds as used by the Census Bureau, Judge Larson said it is “relatively simple” because it only counts how many “occupy a housing unit” and is not confined to dependents or those with family ties. However, she said that nothing in Section 1325(b) “directly or indirectly incorporates the Census Bureau’s definition.”
Judge Larson said that the census approach would allow debtors to count people who are in the house “transiently” without support from the debtor. She found it “improper.”
The income tax dependent approach, only counting those in the household who would qualify as “dependents” on an income tax return, “tends to undercount individuals in one’s household.” Just like the census approach, she said the Bankruptcy Code “nowhere” mandates the IRS definition. If Congress had wanted bankruptcy courts to follow the IRS, “it would have stated so,” she said.
More to the point, Judge Larson said that the IRS definition “can exclude individuals who are financially dependent on the debtor” and can result in “severe undercounting” by ignoring “economic realities.” So, she rejected the IRS approach.
Analyzing the economic unit approach, Judge Larson said that the word “household” in the Code is used to “provide an accurate assessment of a debtor’s finances and what the debtor can pay to creditors over the plan period.” [Emphasis in original.]
To judge an economic unit, Judge Larson said the court should analyze (1) who is financially dependent on the debtor, (2) who financially supports the debtor, and (3) whose income and expenses are intermingled with the debtor’s. She said economic unit is “the most flexible” approach because it “allow[s] the bankruptcy court to adapt to an individual debtor’s unique, personal circumstances.” She also said it could result in a “fractional number.”
Judge Larson did not decide how many were in the household in the case before her. She told the chapter 13 trustee and the debtor to work out their differences using the economic unit approach, because it “provides such an accurate result.” Emphasis in original.
Writing an opinion that reads like a law review article, Bankruptcy Judge Michelle V. Larson of Dallas decided that the so-called economic unit approach is the best method for deciding the size of a “household” in a chapter 13 case. She said it “aligns with the purpose and statutory language of the Bankruptcy Code.”
A couple in chapter 13 were a modern family. Seven members of the extended family lived in the home full time or part time. Not all were solely dependent on the debtors. Some had income of their own, to a limited degree.
The debtor claimed there were seven in their household. The chapter 13 trustee objected, claiming there were only six.
Why does it matter?
As Judge Larson explained in her September 7 opinion, the size of the household can affect the debtors’ median income and whether they are obliged to submit a five-year plan rather than a three-year plan.