Fourth Circuit Carves Up Children (For Bankruptcy Purposes Only)

Fourth Circuit Carves Up Children (For Bankruptcy Purposes Only)

Maybe you've got a friend who is a bankruptcy lawyer.  Maybe not.  But if you do, you should think about forwarding to them this post about the Fourth Circuit's decision from last Tuesday in Johnson v. Zimmer.  It's a decision of first impression in all of the Circuit Courts about how to determine the size of a Chapter 13 Debtor's "household", which is relevant to determining her "disposable income" for purposes of a Chapter 13 Plan.

Let's start with why those terms are important.  A Chapter 13 Debtor is obligated to make payments to his creditors based on her "projected disposable income."  The Bankruptcy Code defines "disposable income" as "current monthly income received by the Debtor" reduced by "amounts reasonably necessary to be expended for the Debtor's maintenance and support, for qualifying charitable contributions, and for business expenditures."

The "amounts reasonably necessary to be expended" are determined, in part, by the size of the Debtor's "household."  Congress didn't bother to define what "household" means, so that was the main challenge for the Fourth Circuit.

How The Dictionaries Define "Household"

Well that's easy, you would think.  Look up "household" in the dictionary.  Because we give undefined words their ordinary meaning. But that doesn't really work because the common definitions for "household" are different and could yield different results.

Black's Law Dictionary says that a "household" is "1. A family living together.  2. A group of people who dwell under the same roof."  Webster's Third New International Dictionary says that the term means "a social unit comprised of those living together in the same dwelling place."

How The Bankruptcy Courts Have Dealt With This Issue

The bankruptcy courts have adopted three different approaches to define a "household."  Those are:

  • The "heads-on-beds" approach, which follows the Census Bureau's broad definition of a household as "all the people who occupy a housing unit," without regard to relationship, financial contributions,or financial dependency;
  • the "income tax dependent" method derived from the Internal Revenue Manual's definition that examines which individuals either are or could be "included on the debtor's tax return as dependents";
  • The "economic unit" approach that "assesses the number of individuals in the household who act as a single economic unit by including those who are financially dependent on the debtor, those who financially support the debtor, and those whose income and expenses are inter-mingled with the debtor's."

The reason that Johnson's case was so difficult was that she was divorced and remarried.  Her new husband had three kids from his prior marriage and she had two.  The children from the first marriages spent about half a year with the Debtor and her new husband and the rest of their time with their other parent.

 

Read this article in its entirety on North Carolina Business Litigation Report, a blog for lawyers focusing on issues of North Carolina business law and the day-to-day practice of business litigation in North Carolina courts.

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Lexis.com subscribers can access a Lexis enhanced version of the Johnson v. Zimmer, 2012 U.S. App. LEXIS 14153 (4th Cir. N.C. July 11, 2012) decision.