Fourth Circuit Bases Household Size on Fractional “Economic Unit”

Posted by NCBRC - July 16, 2012

The Fourth Circuit affirmed the Bankruptcy Court’s calculation of “household size” using a modified “economic unit” analysis in which children sharing residences with ex-spouses were counted in fractional portions. Johnson v. Zimmer (In re Johnson), No. 11-2034 (4th Cir. July 11, 2012).

Under the modified fractional economic unit calculation, the bankruptcy court found that two of the five children constituted .56 members of the household and the other three children constituted .49 members, based on the number of days they spent residing in the debtor’s home. The total membership of the children was, therefore, 2.59, which the court rounded up to 3 members bringing the total household size to 5. Because the issue was one of first impression, the Fourth Circuit granted leave to bring an interlocutory appeal.

On appeal, the Fourth Circuit discussed the three possible methods of calculating household size: 1) “heads on beds,” including anyone who occupies the house; 2) “income tax dependent,” including anyone who could be deemed a “dependent” in tax returns; and 3) “economic unit,” including any member of the household who is a factor in the household economy.

Finding little guidance from the statute itself or from dictionary definitions, the court turned to legislative history and congressional intent. The court found that the “heads on beds” approach was over-inclusive and did not reflect Congress’s intent to calculate household size based on economic factors. Likewise, there was little evidence that Congress intended to incorporate the definition of “dependents” as applied by the tax code, and which would be under-inclusive. The calculation based on economic unit, however, was found to be the best option as tailored to reflect more accurately the debtor’s actual ability to pay creditors; the ultimate goal of BAPCPA. Under this analysis the court found that the bankruptcy court’s method of dividing the children into fractions of the household most accurately reflected the actual economic impact of the children. The court found that this flexible approach was consistent with the Supreme Court’s holding in Hamilton v. Lanning, 130 S. Ct. 2464 (2010).

The court noted that even though, in this case, the resolution of household size under section 1325(b) as 5 or 7, would not change the finding that the debtor was “above-median” for purposes of the means test under section 707(b), the court recognized that the definition of “household” would impact other calculations in the means test.

The dissent agreed with the economic unit approach but differed with the majority’s approval of dividing the members of the household into fractions as lacking support in the statutory text. The dissent warned that this ruling will result in increased litigation over this preliminary inquiry.

Johnson opinion


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