Same-Sex Partners and Bankruptcy: The Means Test & Household Size

Same-Sex Partners and Bankruptcy: "Marriage," Household-Size, and the Means Test

same-sex partners and bankruptcy

Same-Sex Partners and Bankruptcy: Michigan State Law and the Federal Defense of Marriage Act

Same-sex partners or domestic partners present some complex issues for the Chapter 7 or Chapter 13 bankruptcy filing of one or both partners, particularly in a state like Michigan, in which same-sex marriage is not recognized. Individual states have the right under our quirky Federalist system to determine whether they want to internally allow a legal option for same-sex marriage or domestic partnership. A greater number are choosing to do so with each passing election cycle. However, Michigan is not one of these states. At the same time, the US Congress and the Clinton Administration passed the Federal Defense of Marriage Act (DOMA) in 1996 in a stunning act of ignorance, superstition, prejudice, and cowardice. The DOMA defines "marriage" as a union of one man and one woman, specifically. Nevertheless, the DOMA does not preempt states' rights to define marriage internally, but it is what prevents one state's legal same-sex marriage from being recognized in another state which does not recognize the right. (The DOMA has numerous other effects upon Federal employees' right to benefits allowed married couples who are not same-sex as well.) While the DOMA has been found unconstitutional in eight Federal Courts, including the First and Second Courts of Appeals, decried as unconstitutional by the Obama Administration (and Johnny-come-lately President Clinton) which is no longer defending it in court, and a case concerning the DOMA will soon be before the US Supreme Court later this month, it remains, as of this writing, Federal law. What does this have to do with bankruptcy? Bankruptcy is a Federal legal process which relies upon, with regard to certain questions, the laws of the states in which an individual bankruptcy case is brought for further definition or elaboration. For example, if a question of whether a pre-bankruptcy filing transfer of property was fraudulent or not, the six years prior to the bankruptcy may be examined as, in Michigan, six years is the "look-back" period under the state of Michigan's fraudulent transfer statute. An individual state's definition of marriage is another point upon which the Federal bankruptcy process looks to state law---particularly since the US Trustee's Office (the division of the US Department of Justice responsible for overseeing the bankruptcy process) has made its general disinterest in enforcing the DOMA in bankruptcy matters known.

Same-Sex Partners and Bankruptcy: The Means Test and Household Size

In Michigan, therefore, filing bankruptcy while living with a same-sex partner is not appreciably different than filing while living with a non-marital, opposite-sex partner as Michigan is not among the states offering legal options for same-sex marriage or domestic partnership. A person filing bankruptcy in Michigan who is not legally "married" under Michigan state law (therefore, any individual with a same-sex partner or a live-in partner of an opposite gender to whom they are not married), then, files bankruptcy, at first blush, as a single person. The question from that initial point in the analysis revolves around that single, individual bankruptcy filer's "household income." First, to lay some basic groundwork for discussion, since the 2005 BAPCPA Bankruptcy Code amendment by Congress, the question of "household size" and "household income" have become key questions regarding an individual filer's eligibility for Chapter 7 and/or the amount of their monthly Chapter 13 plan payment in a Chapter 13 bankruptcy. Specifically, the size of a household impacts what is called the "means test." The means test is a mathematical formula that determines the eligibility of a person to file a Chapter 7 bankruptcy and which, in a Chapter 13 bankruptcy, also determines whether a minimum amount of dollars must flow through the Chapter 13 payment plan to the unsecured creditors at the lowest payment priority in the plan. It compares the household income of the filing debtor with the household income of the same-sized household in that debtor's state, and, if that person's household income is higher than the state average for a household of his or her size, he or she is not eligible for filing a Chapter 7 bankruptcy. The basic purpose of the means test is to examine the entire household's income in which the filing individual resides. A low-income filer with a high-income spouse may not be eligible for Chapter 7 bankruptcy, even if that spouse is not part of the bankruptcy filing. However, platonic roommates living together in order to split the cost of rent are not intended to be required to calculate their income as though they were married in a bankruptcy petition. But it is also not true that domestic partners or same-sex partners are simply platonic roommates. Sometimes, the living situation may have persisted for decades with no less commingling and sharing of income and expenses between the partners than any so-called "married" couple. Simply filing a Chapter 7 bankruptcy for one partner and ignoring the other partner's income in the household without accounting for it one way or another in the basic mathematics of the Chapter 7 bankruptcy petition will potentially be considered a level of "bad faith" sufficient to have the filing partner's bankruptcy discharge denied by the US Bankruptcy Court. Thus, even in a state like Michigan, which, so far, fails to recognize same-sex partners as legally married, one cannot ignore the cohabitating living situation.

Same-Sex Partners and Bankruptcy: Accounting for a Same-Sex Partner's Income

There are different ways to account for a domestic partner's income, depending upon local practice and depending upon the individual living circumstances of the partners in question. Household income is considered in the bankruptcy petition not just on the means test but also on separate schedules which account for average monthly income of the household and the average monthly expenses of the household. Although, without a "legal marriage" present in a Michigan bankruptcy, the non-filing partner will not be subject to certain requirements of document provision and other points of protocol in the bankruptcy process, the partner's income will need to be accounted for. In a Chapter 13 bankruptcy, a monthly payment that is made by the filing debtor to the bankruptcy court which is used, over 3-5 years, to repay the filer's creditors to the extent of the individual's ability to repay them after household expenses over that period of time, there is a further level of complication as the plan payment amount is premised, basically, upon the "net income" of the household. That is, the monthly average income that is left over after monthly average expenses are taken into account. At the same time, under the Bankruptcy Code, a Chapter 7 or 13 Trustee can exert no influence over the assets of a non-filing spouse, let alone the assets of a non-filing non-spouse. The extent to which the non-filing partner's income may be "backed out" of the household income calculation will require experienced legal advice. The non-filing spouse's income, in short, is going to make itself known in the bankruptcy process as "contribution" income in the means test and, in the average monthly income/expense schedules, as "contribution" income on the expense side or by way of halved or reduced expenses on the household expense schedule. Given the general legal confusion between Michigan state law and the not-enforced DOMA, there is no one "right way" to perform these calculations. However, if you do have a same-sex partner with whom you cohabitate, you will certainly require the advice of an experienced Michigan bankruptcy lawyer to determine the best way to draft your Chapter 7 or Chapter 13 schedules. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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