Fourth Circuit Adopts Economic Unit Definition of Household

By Columbia – Lexington Bankruptcy Attorney Lex Rogerson

The Court of Appeals for the Fourth Circuit has decided the means test, the statutory formula for determining disposable income of consumer debtors, must take into account the income and expenses of those who are financially interdependent with the debtor.

Everyone involved in the bankruptcy process acknowledges that Congress did a pathetic job of draftsmanship when it enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the most significant change in the Bankruptcy Code since it was enacted in 1978. Nowhere is the lack of clarity more evident than in the signature feature of the revisions — the means test, a formula designed to standardize the determination of whether a debtor can afford to pay his creditors and, if so, how much.

Ambiguity abounds in Section 707(b), which sets out to explain the workings and effect of the means test.  The most basic problem is that the formula requires the debtor to include the income and expenses of his household but never defines that term.  Making things worse, Congress used related terms like “family” and “dependents” in the same subsection, leaving it unclear whether these terms mean the same as household or something different. To all appearances, Congress naively assumed that everyone lives in an Ozzie-and-Harriet lifestyle, when in fact living patterns in the nation are hugely diverse.

As a result of this boneheaded legislating, debtors and their lawyers could not be confident how this important feature of most bankruptcy cases was supposed to work. Courts around the country are fairly evenly divided among three competing definitions of the household.  The “heads on beds” approach would include all those who actually occupy the home, regardless of their relationship to the debtor.  The “income tax dependent” approach, by contrast, would include only those the debtor could claim as dependents under the Internal Revenue Code.  Finally, the “economic unit” approach — a middle ground of sorts — would include those who support the debtor, those whom the debtor supports, and those whose finances are intermingled with the debtor’s.

Until July 11 of this year, the bankruptcy court in South Carolina appeared to adopt the income-tax-dependent approach.  In a 2006 decision called In re Napier, Judge Waites reasoned that in using the word “dependent” throughout section 707(b), Congress intended that concept should guide the determination of household members. Now that conclusion appears undermined.

The case the Fourth Circuit used to decide this issue involves a North Carolina debtor named Tanya Johnson.  Like an increasing number of Americans, Ms. Johnson has a blended family.  She and her former husband share custody of two minor children, while her current husband has joint custody of his three children.  All five children spend half or more of their days in the Johnsons’ home and receive some degree of support from both of their respective parents.  Depending on the definition ultimately adopted, Ms. Johnson’s household could be two, seven, or somewhere in between.

Noting the varied approaches adopted around the country, the Court of Appeals first decided the term “household” is ambiguous. It then considered what approach would be most consistent with the purposes of the means test — to ensure that those who can afford to pay their creditors do so.

The court rejected the heads-on-beds test as too broad because it counts putative household members without regard to their impact on the debtor’s real finances.  By the same token, it rejected the income-tax-dependent approach as too narrow because it disregards family members for whom the debtor must provide substantial financial support.  The court concluded that the economic-unit approach represents the best accommodation, considering those who have a real effect on the debtor’s resources and ability to pay creditors.

The court then did something a little surprising: like Solomon, it agreed to split the baby.

In applying the economic-unit approach that was ultimately approved, the bankruptcy judge who initially decided Ms. Johnson’s case had adjusted for part-time members of the household by counting each of the five children as a fractional member. Based on the percentage of each child’s time spent in the Johnson home, the bankruptcy court calculated that on the average, the home contained 2.59 children.  Rounding this number up to 3 — the means test uses only whole numbers for household size — and adding Ms. Johnson and her husband, it decided the applicable household size was 5.

In guarded language, the Court of Appeals found this procedure not to be in error. It recognized that dividing persons into fractions was less than ideal. It also conceded that time of occupancy is not always related to economic impact. But it found that splitting part-time occupants into fractional household members rationally accounts for those who can neither be wholly excluded or wholly counted.

In re Johnson leaves several questions for decision on another day. How much absence from the home will require a debtor to split a child? What if a debtor provides the majority of the support for a child who lives with him a small percentage of the time — or the reverse? Do you count a friend or relative the debtor has no legal obligation to support?

But every potential new rule leaves open such questions of application.  Now, at least, the rule is settled, and we can get down to dealing with the applications.

About

Lex Rogerson is bankruptcy lawyer in Lexington, South Carolina. He is a native of Darlington, SC and attended public schools in Columbia. He graduated from Yale University and the University of South Carolina School of Law.

After admission to the bar in 1978, Lex worked for the state department of labor, trying occupational safety cases. He then realized a dream of living in the Rocky Mountains, moving to Missoula, Montana, where he worked with a small civil law firm. In 1981, he returned to South Carolina to work as a public defender.

Lex began private practice in Lexington in 1984 and has been representing consumers in bankruptcy cases since. He has always concentrated on representing ordinary individuals and throughout his career has assisted clients in criminal defense, police misconduct, personal injury, small estates, and appeals. For the last 10 to 15 years, bankruptcy has been his primary area of practice.

Bankruptcy attorneys and other lawyers frequently ask Lex to speak at seminars. He has led presentations on bankruptcy law the general practitioner needs to know, ethical issues in bankruptcy practice, and current developments in consumer bankruptcy. In 2008, a bankruptcy judge asked his collaboration in a seminar on trial evidence in bankruptcy court.

For three years, Lex taught legal writing as an adjunct at the USC School of Law. He understands that explaining the law clearly, not in jargon, is as important when discussing options with a client as when writing for a court. As someone told a group of lawyers many years ago: like it or not, when you entered law school, you became a professional communicator.

Understanding a lawyer’s obligation to serve the public and the justice system, Lex has been president of the Lexington County Bar Association and serves on its advisory committee. He is circuit and regional chair of the Resolution of Fee Disputes Board and a member of the SC Bar Pro Bono Committee. In 2001, he was named Pro Bono Attorney of the Year. The SC Supreme Court awarded him a certificate of appreciation for public service in 2002, and in 2006, he received the Billy Robinson Public Service Award from the SC Bankruptcy Law Association.

Lex has been lead attorney on published decisions in the South Carolina Court of Appeals and Supreme Court and in the federal Fourth Circuit Court of Appeals. He maintains an “AV” rating in Martindale-Hubbell Law Directory, the highest category for both legal ability and ethical standards.

Lex and his wife Shirley have been married for 27 years. They have two daughters, ages 19 and 22. While away from the office, Lex enjoys backpacking and hunting. He plays catcher in the SBL, a senior men’s baseball league. Though an unimpressive hitter, his teammates nevertheless say he plays hustling defense, calls a good game, and is fearless on plays at the plate.

Contact Information:

Lex A. Rogerson, Jr.
P.O. Box 365
111 E. Main Street, Ste. C
Lexington, SC 29072
(803) 359-5520
(803) 359-5555 (facsimile)
[email protected]

**CV, BV, and AV are registered certification marks of Reed Elsevier Properties Inc., used in accordance with the Martindale-Hubbell certification procedure standards and policies.

Lex Rogerson, Columbia Area Bankruptcy Lawyer


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