Fourth Circuit Adopts Economic Unit Approach to Household Size - U.S. Fourth Circuit
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Fourth Circuit Adopts Economic Unit Approach to Household Size

Family law matters can complicate a Chapter 13 bankruptcy proceeding when determining the debtor's household size.

So how should a debtor determine her household size when she shares custody of her children? In the Fourth Circuit Court of Appeals, she should use a fractional, "economic unit" approach.

In this case, the debtor and the creditor were former spouses. The debtor filed a voluntary petition for Chapter 13 bankruptcy, and her ex-husband objected. He claimed that the proposed plan overstated the debtor's household size, resulting in an inaccurate calculation of her monthly expenses. The creditor maintained that as a result of this alleged error, the debtor's proposed Chapter 13 plan improperly showed a "disposable monthly income" insufficient to make payments on two unsecured loans for which the former spouses were jointly liable.

The debtor and creditor shared joint custody of their two minor sons. Neither paid child support, and they shared their children's expenses equally. The children resided with the debtor for 204 days each year. The debtor's current husband has joint custody of three children from his previous marriage. The step-children resided with the debtor and her husband approximately 180 days per year.

The debtor's proposed Chapter 13 plan claimed a household of seven members, counting individually each person who resided in her home for any period of time within the past six months. The creditor asserted that number was inaccurate because the five children and step-children did not live at her residence full-time.

The creditor claimed that, rather than simply counting the number of "heads on the bed" to determine household size, the plan should use a method that better approximated the actual economic impact of each individual on the debtor's expenses. Such an approach would result in a lower calculation of monthly expenses, and demonstrate that she had income available to pay toward her unsecured debts as part of a proper Chapter 13 plan.

The bankruptcy court observed that the term "household" is undefined in the Bankruptcy Code, there was no binding precedent on point, and that other bankruptcy courts followed three different approaches to define that term. Here, the bankruptcy court chose to adopt a variation of the "economic unit" approach, first assessing the number of individuals whose income and expenses are intermingled with the debtor's, and then calculating how much time any part-time residents were members of the debtor's household.

Implementing this fractional economic unit approach, the bankruptcy court concluded that the debtor had 2.59 children in her household full-time, which the court then rounded up to 3 children. Thus, the debtor, her husband, and the three children yielded a "household" of five.

The Fourth Circuit Court of Appeals, in a matter of first impression for federal appellate courts, concluded that the bankruptcy court did not err in recognizing that the debtor's actual household size fluctuated due to custody arrangements, and properly calculated individuals as fractional full-time members of the household.

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