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‘Household’ head count in bankruptcy: first appellate case

It’s not just “heads on the beds” that count when a bankruptcy court is trying to determine “household” size for a Chapter 13 debtor who shares joint custody of two children with her ex-husband. A better count comes from an “economic unit” analysis, according to the 4th U.S. Circuit Court of Appeals.

The court’s July 11 decision in Johnson v. Zimmer is the first time a federal appellate court has weighed in on an issue that crops up more and more: figuring out the Bankruptcy Code’s “household” head count when a debtor has a split-custody arrangement.

Debtor Tanya Johnson shared joint custody of her two children with her ex-husband, and the children lived with her 204 days of the year. Neither parent paid child support, but they shared the children’s expenses. Johnson’s current husband had joint custody of three children, who also lived with Johnson part of the time.

Johnson counted all seven residents when calculating her household size for her Chapter 13 plan. But her ex-husband challenged that count, saying it didn’t leave her with enough disposable income to pay her share of two unsecured loans Johnson had taken out with her ex-husband.

The North Carolina federal bankruptcy court outlined three possible approaches to the math problem: the “heads on the bed” approach used by the U.S. Census Bureau, the “income tax dependent” formula derived from the Internal Revenue Manual and the “economic unit” approach that counts the number of individuals who act as a single economic unit financially dependent on the debtor.

Applying the third approach, the bankruptcy court counted 2.59 children for Johnson, but said she could round that number up to three, to amend her plan from seven to five in her household.

The appellate panel’s own “household” split over the case. Judge G. Steven Agee’s majority opinion upheld application of the “economic unit” test – used by a majority of bankruptcy courts – as a method that satisfied the language of the Bankruptcy Code but did not create an “unrealistic assessment” of a debtor’s disposable income.

Judge J. Harvie Wilkinson III disapproved of the majority’s decision to break a debtor’s children into fractions in order to address “the increase in split custody arrangements.”

“Courts can still take economic realities into account without slicing a debtor’s dependents into bits and pieces,” Wilkinson said in dissent. He said the “economic unit” approach would require courts to “scour a debtor’s financial records” and hear testimony from a debtor and his family, leading to “lengthy and intrusive” proceedings.

By Deborah Elkins

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