If you’re facing insurmountable debt, living with family can eliminate many expenses and provide significant economic relief. But if you’re considering filing for bankruptcy, it can also introduce a level of complexity to your process, and possibly derail your ability to qualify for a Chapter 7 bankruptcy. Here’s what you need to know.

There are two types of personal bankruptcy filings that people pursue: Chapter 7 bankruptcy discharges debt, while Chapter 13 redistributes it, creating a payment plan that may reflect reduced interest rates, a more extended payment period, or other favorable terms meant to make the debt more manageable. Chapter 7 is only available if the debtor passes a means test. The means test calculates how much you owe and what your income and living expenses are.  If the test shows that you have enough money to make monthly payments and to support yourself then you will not qualify for Chapter 7. The complexity that could arise when you are living with your parents is that there’s a good chance that their income will be factored into your means test calculation.

The means test compares your household income to the median income in the state where you are filing for bankruptcy, and median income is calculated by how much money is coming in and how many people are living in the household. You are required to provide this information, as well as household expenses. If you are trying to escape your debt, even if you aren’t personally earning income, your parents’ income may be counted in the median household income calculation and may effectively put you well above the threshold that would qualify you for having your debt discharged under Chapter 7.

Every bankruptcy court operates differently, and there are three possible ways that they can calculate household income.

  • The Census Bureau Approach counts everybody who lives in the household and their income.
  • The Dependent Approach calculates the debtor and their spouse if they have one, as well as any dependents that could be written off under IRS rules. Financial support given or received to or from anybody else living in the home does not count.
  • The Economic Unit Approach recognizes different living arrangements and dependencies within a household.

To ensure that your situation is treated fairly and to understand what your options are, you need to speak to an experienced, qualified bankruptcy attorney. Contact us today to set up a time for us to chat.

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