Special Rules for Military Members in Bankruptcy

If you are a disabled veteran or are on active military duty, there are special rules that may help you in bankruptcy.

If you are a disabled veteran or are on active duty, you may be entitled to special exceptions from requirements if you file bankruptcy. Read on to learn more.

(If you're worried about how it might affect your enlistment, see Will Bankruptcy Affect My Ability to Enlist in the Military?)

Chapter 7 Means Test Exemption

To qualify for Chapter 7 bankruptcy, you have to meet certain income requirements by passing what is called the means test. Your military income would normally be included in the means test.

If you are a disabled veteran or are a member of the National Guard or Reservist, you may be exempt from passing the Chapter 7 Bankruptcy means test. This exception is limited, with several conditions.

Disabled Veteran Exemption

If you are a veteran and have a disability, you do not have to pass the means test if the debts you are seeking to discharge were mostly incurred during the following periods:

  • during active duty, or
  • while performing activities related to homeland defense.

This means that the military disability compensation that you have been receiving for the last six months will not be included in determining your income eligibility for a Chapter 7 bankruptcy, regardless of how much compensation you have been receiving.

Qualifying Disability

To take advantage of the means test exception, you must have a qualifying disability. You have a qualifying disability if:

  • your disability has been rated 30% or more under the Secretary's disability compensation rules, or
  • you were discharged or released from active duty because your disability was incurred or aggravated while in the line of duty.

“Active Duty:” Limits and Exclusions

Not every disabled veteran who was injured while in the military will qualify for this exception. That is because the rules define “active duty” as full time military service. It can include full-time training and attendance at military schools.

Full-time National Guard duty is excluded from this definition. However, if you are in the National Guard, you may still be entitled to the means test exception on a different basis.

National Guard or Reserve Exemption

If you are a reservist or member or the National Guard, you may be able to opt out of the means testing requirement if:

  • you were on active duty or participated in homeland defense activities for a continuous period of at least 90 days, and
  • you file bankruptcy within 540 days (18 months) after you leave active duty.

This exception arises from the National Guard and Reservists Relief Act of 2008 (NGRRA). It is only temporary. The NGRRA is due to expire December 2015, although it may be extended.

Veterans Benefits May Be Exempt Assets in Bankruptcy

If you receive veteran’s benefits, they may be exempt as assets in your bankruptcy. If you live in a state that uses the federal bankruptcy exemption system, then those benefits are exempt. If you live in a state that has opted out of the federal bankruptcy exemption system, then your state's exemption laws may also protect your veteran's benefits.

Veterans benefits may, however, be included as part of the income means test to determine your eligibility for bankruptcy, unless you qualify for one of the means test exemptions discussed above.

Pre-Bankruptcy Credit Counseling

Most debtors are required to complete  consumer credit counseling before filing bankruptcy. However, if you cannot complete the pre-bankruptcy credit counseling requirements because you are in a recognized military combat zone, then you are exempt from this requirement.

Servicemembers Civil Relief Act

The Servicemembers Civil Relief Act of 2003 (“SCRA”) is a federal law that provides some protection to members of the military from debt collection actions. The SCRA prevents or postpones:

  • foreclosures and debt collection default judgments
  • bank attachments
  • evictions, and
  • wage garnishments.

While the SCRA is usually beneficial in non-bankruptcy matters, it can also provide you with an added layer of protection while in bankruptcy. The SCRA can stay (stop or delay), for periods of 90 days or more after you have left active duty service, adversarial or contested proceedings in bankruptcy such as:

  • default judgments on complaints to determine dischargeability
  • objections to discharge
  • trustee actions to attach your property
  • debtor's examinations, and
  • post-bankruptcy evictions and collection actions, such as when a creditor is granted relief from the automatic stay.

See an Expert

If you have questions regarding bankruptcy, your options, or how your finances may affect your security clearance or military standing, talk to an attorney. See our section on Using a Bankruptcy Lawyer.

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