Bankruptcy Baby: Median Income and Household Size

I. Bankruptcy Vows

In filing bankruptcy, a married debtor may file singly sans spouse, or jointly, with her spouse. Yet, what is a married debtor? California's defined marriage as both opposite- and same-sex unions. Yet, the federal Defense of Marriage Act (DOMA) established marriage as strictly an opposite-sex union. Since bankruptcy is federal law, DOMA bars joint filings by same-sex spouses.


Yet, it's been a concurrent trustee argument that a non-filing, same-sex spouse's entire income is presumptively considered the filing spouse's community income. Community income is the marital principle whereby one spouse's income is the other spouse's income. Bankruptcy's income-centric; counting a non-filing spouse's income can preclude chapter 7 eligibility or inflate one's chapter 13 payments.

Now, a trustee position is not law; it's a position. The same-sex married debtor may argue to the arbiter--the Court, that if she is not married for bankruptcy-filing purposes, she should not be considered married when tallying income. Case law supports that debtor's position: See In re Shari- Anne Roll (which is similar to a rainbow roll, no, nevermind, I'm thinking sushi). The court there denied the United States Trustee's (UST's) intention to compel inclusion of Shari's precluded-from-filing spouse, Renee's income. The court denying a UST motion is a function of balance of powers between the Judiciary and the Department of Justice; it's internecine government warfare in bankruptcy court. Anne Roll is a Wisconsin case, FWIW.

II. Smack

That's marriage. Now on to babies. As you recall from Statistics class (I got an A in that, but then that was the most advanced college "math" I had), "average" or "mean" requires that you add items and divide by the number of items. Median is whatever number falls smack in the middle of your spectrum. Median state gross income is a benchmark factor in bankruptcy. Where you place--above it or below it--can indirectly and respectively affect chapter 7 eligibility, the length of a chapter 13 plan, and/or the monthly chapter 13 payment.

Median income is relative to "household size." The more peeps in the household, the higher the applicable median income, and the more likely you'll fall below it. Fall below the median and your net bankruptcy benefit is likely to increase.

III. Heads

The problem: what is "household size?" As with marriage, definitions differ. The U.S. Census definition of "household" correlates to "heads on beds;" luckily, that only sounds horribly gruesome. With the heads-on-beds approach, one counts the human heads (which weigh 7 lbs each according to that little kid in Jerry Maguire) in a dwelling, and you have "household size." This implies that roommates count as household members (but try that gambit at your own risk). Trustees might argue the "household" strictly equates to nuclear family and tax dependents. The debate hasn't entirely come to a head. Haha.
Oh, wait. Babies, we were gonna talk babies.

IV. Bankruptcy Baby

Before there are babies--which are new heads on beds--there are buns in ovens. And that is our subject: is the proverbial bun part of the household size? Trustees argue, nay, and an Oregon district court case, In re Fleishman, (2007) 372 B.R. 64 supports that proposition; there, an Oregonian judge concluded the unborn baby was not a household member.
Fleishman dealt with the effect of household size in a chapter 13. We'll get back to household size in chapter 7s later, if I remember to do so.

In chapter 13, whether debtors are above or below median-income is what determines the length of their chapter 13 repayment plan or their "Applicable Commitment Period (ACP)." In chapter 13s, below-median debtors are eligible for a shorter, 3-year payment plan; above-median debtors need to complete a 5-year plan. The gestating Fleishman baby would have put her parents in a 3-year plan, since the addition of a household member would raise the applicable median income above the Fleishmans' gross. But Mama's baby bump--by virtue of being a bump and not a baby--bumped them into a 5-year plan.

Interestingly (well, relatively so, I mean, this is a Bankruptcy Blog for Heaven's sake), in determining the ACP, the court suggested that in chapter 13, the household size could be amended after filing the bankruptcy. The reason given is the ACP is statutorily deemed effective upon "Confirmation" (i.e. approval and cementing) of the Chapter 13 Plan. Confirmation can occur many months after filing the chapter 13. Thus, according to the Oregon court, a baby birth mid-bankruptcy could facilitate an amendment that would save mum and dad lotsa money. Household size is not set in stone the moment you file a chapter 13.

Side note: the Fleishman court dealt only with the effect of household size (as it affects median income) upon the ACP. It did not address how household size also affects "Disposable Monthly Income," which is a threshold figure for the amount of monthly repayment to unsecured creditors in chapter 13. That figure is a function of household size, because it's based upon total household income less standard expense allowances, which increase by number of household members. The Fleishmans' judge opined at page 66 that he would "leave [the issue of disposable income] to another day, although the case [was] clearly pregnant with it." Haha.

V. Oregon State of Mind

But keep in mind,what happens in Oregon stays in Oregon. Its courts do not carry legal authority in sunny San Diego. Someday, we may have to take up the cause of the unborn San Diegan.

VI. Lucky 7?
Given the aforementioned opportunity to amend household size, the baby-bump exclusion is less prejudicial in chapter 13. It is more damaging in the context of household size and median income in chapter 7s. In a 7, there's no post-filing confirmation event that would permit post-filing addition of post-filing baby. In a 7, household size is set in stone the moment you file. And a larger household size (which affects applicable median income) can decide if chapter 7 is a go or no.

[Intermission. Change reels, visit the loo, grab a drink, this blog is way too long.]

Better now.
We had mentioned state gross-median-income as it relates to chapter 13 plan length and payment amounts. In chapter 7, median income simply affects eligibility. Below median-income debtors presumptively (more readily) qualify for a 7. Again, median income corresponds to household size; with more household members (like the baby-to-be), the higher the median income threshold and the more likely you'll fall below it.

VII. Illustrative Baby

In California (ingrained pronunciation: Cal-i-FOHRN-iah. Danke schon, Arnie!), the median income for a household of 1 is $47,234/year (that's currently; it changes frequently). If pregnant Debbie Does Chapter 7 and earns $50K, she may less readily qualify. Count her belly and increase the household to 2 (for which the median income is $61,954) and she's easy, that is, more-likely-than-not good to go for a 7. [Again, these are median income figures in CA. If you're from out of state, then 1) envy our weather and 2) look up your own median income figures.] But such math is contested; Debbie will have to fight if she wants to be good to go.

In chapter 7, household size still factors in if you're above median. An above-median debtor can still qualify for chapter 7 if certain standard expenses sufficiently offset his income. Those standard expense allowances relate directly to household size; hence the larger the household, the more expenses one claims and more readily qualifies for chapter 7.
VIII. Not Strictly for the Birds

From the standpoint of income and expenses, which is at the heart of things in bankruptcy, it would be equitable to count the fetus as a household member: child-related expenditures [prenatal vitamins, checkups, Honda Odyssey) can be higher before the bouncing boy or girl is born. Homo sapien nesting begs for more than sticks and twigs.

It also may feel arbitrary that household size should be counted differently if a permanent addition to the household will be imminently introduced. Why did the Oregon court disagree with these dollars and sense? Because the court anticipated the ramifications of prematurely counting the baby-to-be.
The court correctly predicted the inevitable danger of compulsive procreation; hasty impregnations on the eve of chapter 7. These would be blatant attempts to hinder, delay, and defraud creditors. Such form of manipulation is explicitly proscribed in the United States Code sections 707(a)(1), and 727(a)(2). It would not be conscionable to the courts that prior to filing, a debtor would get busy in a manner not pertaining to careful review of a bankruptcy petition. And with the trials of ovulation, conception, and tell-tale morning sickness, yours truly would suffer a rash of constantly flush clients who cannot answer the simple query: what is your household size? A slippery slope indeed, or--as Bill Murray put it aptly in Ghostbusters: "Human sacrifice, dogs living with cats, mass hysteria."
Similarly, after filings of chapter 13s, debtors would conspire to conceive pre Plan-Confirmation. All in further effort to enable bad faith amendment to bankruptcy papers. These maneuvers would constitute impermissible instances of getting-jiggy-with-it, in the stead of diligent commitment of disposable income.

IX. How many goofy undergrad classes did you take?

I don't very-well remember undergraduate philosophy class. It's filed in the brain's forgotten filing system. Yet, I suddenly recall the topic of logical fallacies and the fallacy of the slippery slope. But, I will leave logical fallacies to another day, although this blog is pregnant with it.

Conclusion
Thus, in federal bankruptcy court, marriage is conservatively defined, babies are not. It does not make sense, don't try to sort it out. Still, the concept troubles, this uncertainty indubitably on a par with instances of human sacrifice, dogs living with cats, mass hysteria. Or at least a bad case of dogs living with cats.
AA, San Diego, 2011
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Disclaimer: the above is general information that's applicable in CA only; it is not legal advice that should be relied upon.