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There is a marriage penalty in bankruptcy law.  Unmarried couples receive favored treatment, especially on the six-month income calculation called the Means Test.
A married debtor who lives with his or her spouse must list all gross income of their spouse on the income schedules.  However, an unmarried debtor who lives with a partner must only show that person’s regular contribution to the household income.
This difference represents a significant disparity of treatment. Unless the bankruptcy trustee investigates the income of a debtor’s partner, a debtor may be able to claim their income is below median income levels and thereby qualify for Chapter 7, even if the partner has a six-figure income.
All Income vs. Regularly Contributed Income:
Reporting all income versus just reporting regularly contributed income.  That difference is massive.
Bankruptcy Form 122-A is where we report a debtor’s household income received in the prior six months. This form determines who may enter the gates of Chapter 7.
Notice how Form 122-A requires a debtor to list the gross income of his or her spouse on Column B, however there is no requirement to list the gross income of a live-in partner, even if the debtor and his or her partner share children, real estate, debts, bank accounts and other financial obligations.
What is required is that a debtor report all regular income contributed to the household by the partner. But how can we be sure the debtor is reporting the correct contribution? Why is a live-in partner who is basically a spouse in every way treated so differently? How is this difference in treatment fair or proper?
Difficulty in Measuring Non-debtor Partner’s Contribution to Income:
Measuring the “contribution” of the debtor’s unmarried partner is difficult.  The partner is not filing bankruptcy and is not the client of the bankruptcy attorney.  Getting information from such individuals can be difficult.
How is the bankruptcy attorney able to accurately measure the income of the debtor’s partner?  The unmarried partner signs no documents to verify income.  The partner may very well maintain a separate bank account and the debtor may actually be unaware of the partner’s true income level.
So how does the attorney measure the contribution?  We look to several factors:

• Bank Statements.  We examine the deposits listed in the debtor’s bank statements and the expenses paid by the debtor from these accounts.
• Monthly Bills.  Attorneys gather information on the total household rent, utility, food, insurance and educational expenses.
• Educated Guess: If the total monthly expenses of a household is, for example, $3,000 and the bank statements of the debtor show $1,500 of payments towards this total, it is reasonable to assume the debtor’s partner is regularly contributing the remaining $1,500.

Fairness Issues:
What if the debtor is paying the majority of household bills but the non-debtor partner earns a significantly higher income that they keep in their separate bank account? This arrangement has the effect of minimizing the “regular contribution” towards household income that is disclosed on the Means Test.  Is that fair and correct?
The means test does have a Marital Deduction for expenses of the non-debtor spouse, but those expenses are limited to completely separate expenses and cannot include expenses of the household.  For example, if the non-debtor spouse pays for an expensive medical treatment, that expense cannot be claimed as a marital deduction since it is limited by the household expense limits of Form 122-A.  However, if the non-debtor spouse contributes a large amount to their 401(k) account that deduction is allowed since it is not a shared fund. These distinctions tend to be technical.
The bankruptcy marriage penalty is stiff.  Married debtors are more likely to be forced into filing a 5-year repayment plan in Chapter 13.  Unmarried debtors can manipulate the system to report only “regularly contributed” income of their partner and thus qualify for Chapter 7 cases by hiding income from the court.
It seems like the US Trustee should focus more efforts to ensure the treatment of married couples is no different than the treatment of unmarried couples who share children, homes, accounts and debts together.
 
Image courtesy of Flickr and Shelley Rich

One of these days I’m going to write a post on how shitty we treat married couples in this county.  From a financial perspective, is it better to be married or to shack up? I’m going to write a list. There are some legal benefits to being married, but from what I see its more of a financial burden.
Maybe I’m just getting old and cranky, but it seems like you can avoid a lot of financial regulations and limits by just living together.
Need an example?  Well, if you are married you are responsible for the medical debts of your spouse, but not if you just live together.  In fact, some couples actually divorce just to avoid the medical debt that comes with being married. How is this fair? Where are the “Family Values” folks when it comes to correcting this inequity?
The Bankruptcy Reform Act of 2005 was designed to address this issue.  It was designed to require a debtor to report all “household income” received in the past six months, regardless of whether a debtor was married or not.
I can read a case and smell unreported income, and that really ticks me off. Why? Because I don’t do that. I list all household income. I question debtors carefully and report the income they are inclined to hide.
And because I take this job seriously and report all household income, this forces some clients into 5-year Chapter 13 repayment plans instead of Chapter 7. It ticks me off when I see an attorney hide income and get away with it but my clients are forced into repayment plans.  What really gets me is that it is so obvious what they are doing. All the clues are right there in the bankruptcy petition.  So how do they get away with this?
The first trick to getting a higher-income debtor into chapter 7 is to misrepresent the size of the household.  The bigger the household the more a debtor’s income can be in chapter 7.  And since the bankruptcy code does not define household size, courts have used three approaches:

1. Heads in Beds–Household size equals the number of people who live in the home.
2. IRS Dependency Test–Household size is equal the debtor the dependents listed on a tax return.
3. Single Economic Unit — A wide variety of factors are reviewed to determine household size.

The best approach is the Single Economic Unit test. The courts weigh the facts of each case.  It’s a continuum.  Do the persons in a home function more as a single unit or as separate units?

• Married with kids living together: Single Economic Unit
• Not married but living together, have kids together, use joint bank accounts, have joint debts and share toothbrushes: Single Economic Unit
• Met last week at the bar, stayed the night and just haven’t left: Separate units.
• Not married, living together, no kids in common, separate bank accounts, no joint debts: Separate units.
• Not married, living together, no kids in common, joint bank accounts, joint assets:  Um . . . could go either way.

If the individuals living in the home form a Single Economic Unit, they all count for the household size. But if they keep everything separate and just share the same housing unit (i.e., like college roommates), they do not count towards the household size.
So, this is the game bankruptcy attorneys play.  If a debtor’s income is over the median income level, we look for additional household members.  Can we add the girlfriend? Are the kids living with the debtor enough of the time to add one or more of them to the household size? Do parents qualify as part of the household? The bigger the household size the higher a debtor’s income may be when qualifying for Chapter 7.  So, the attorney looks for bodies.
When I see “contribution from roommate” on the income statement and then I see minor kids listed in the household size, my radar goes off. Is the roommate the parent of those kids? If the “roommate” is actually a parent of the debtor’s children, shouldn’t all the gross income of the roommate be listed and not just the contribution?
When I see roommates listed as part of the household size but the income of the roommate is not listed or is minimized as a “contribution” to household income, I become suspicious that income is being hidden.
A game is being played by the debtor’s attorney.  Household sizes are being expanded to include others but income of the debtor’s “roommate” is minimized.  This is how you qualify higher-income debtors for Chapter 7: Increase the household size and limit the income of roommates to mere contributions.
Image courtesy of Flickr and Mike Prince

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