Special Rules for Military Members in Bankruptcy

Find out how filing for bankruptcy could affect your ability to enlist in the military, and how special rules could help you qualify for Chapter 7 If you are a disabled veteran or are on active military duty.

By , Attorney · Case Western Reserve University School of Law
Updated By Cara O'Neill, Attorney · University of the Pacific McGeorge School of Law

Dated June 22, 2020

If you are a disabled veteran or are on active duty, you might be entitled to special exceptions from requirements if you file bankruptcy. But if you're like most, you want to know whether bankruptcy might affect your security clearance or, if you haven't joined yet, your enlistment, before you take that step.

While there is no hard rule that says your security clearance will be affected by bankruptcy, large amounts of debt may. Your superiors will usually review issues with your security on a case-by-case basis, so it may be worthwhile to look into it with someone you trust. If you're concerned you won't be able to enlist, skip ahead to Will Bankruptcy Affect My Ability to Enlist in the military?

Military Members and the Chapter 7 Means Test Exemption

To qualify for Chapter 7 bankruptcy, you have to meet specific income requirements, and you'll prove it by passing what is called the means test. You would typically include your military income in the means test.

If you are a disabled veteran or are a member of the National Guard or Reservist, you might be exempt from passing the Chapter 7 means test. The exception is limited, however, and has several conditions you must meet. (If you're not sure which chapter would be best for you, start by learning more about the differences between Chapter 7 and 13.)

Disabled Veteran Exemption

If you're a veteran and have a disability, you don't have to pass the means test if you incurred debts primarily during the following periods:

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

You won't include the military disability compensation that you received for the last six months when determining your income eligibility for a Chapter 7 bankruptcy, regardless of how much payment 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 you incurred or aggravated your disability 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 could still be entitled to the means test exception on a different basis.

National Guard or Reserve Exemption

If you are a reservist or member of the National Guard, you might 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; however, the NGRRA has been extended several times and is currently valid until December 2023.

Veterans Benefits Might Be Exempt Assets in Bankruptcy

If you receive veteran's benefits, they might be exempt assets in your bankruptcy. If you live in a state that uses the federal bankruptcy exemption system and you choose to use the federal exemptions, then those benefits are exempt. If your state has opted out of the federal bankruptcy exemption system, then your state's exemption laws might also protect your veteran's benefits.

Veterans benefits will be 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.

Will Bankruptcy Affect My Ability to Enlist in the Military?

A bankruptcy alone won't prevent you from joining the military. But you must meet specific financial standards to enlist, and previous economic instability can be problematic. On the bright side, taking care of debt problems through bankruptcy can make someone a stronger military candidate.

Finances When Enlisting in the Military

Each branch of the military has recruitment criteria that will consider your financial background. The requirements ensure that each branch complies with the Department of Defense requirement that "…members of the Military Services…pay their just financial obligations in a proper and timely manner."

The military examines your finances to ensure that you're responsible, reliable, and trustworthy. Not only is it believed that financial background could contain indicators of these traits, but also that it's essential to verify that you can live on a military salary.

Another reason is that someone who struggles financially can be a security risk because of susceptibility to bribery and embezzlement. This factor will be scrutinized closely if a particular job requires a security clearance.

Financial Eligibility

At some point during the recruitment process, the military will review your financial background. You might have to fill out an application for a Financial Eligibility Determination (FED). Some branches of service have stricter standards than others, and not all of them require you to fill out a form FED. During the FED process, or as a separate review, the military will examine your financial circumstances—including your credit history, current ability to pay your debts, and your ability to support yourself and your family.

Some of the factors that the military might view as a negative when considering your approval for enlistment include:

  • passing bad checks
  • repossessions or foreclosures
  • frivolous or irresponsible credit card spending
  • loan fraud, income tax evasion, embezzlement, or other potentially criminal financial conduct
  • charge offs, and
  • signs that you are living beyond your means, such as a high debt-to-income ratio.

How Bankruptcy Might Affect Your Military Enlistment

It's not so much the bankruptcy itself that matters, but what it says about your financial circumstances and your character. Some bankruptcies might reflect negatively on the applicant; others might not.

Bankruptcy Circumstances That Could Hurt Your Military Application

Filing for bankruptcy for less-than-honorable reasons can be a negative factor. Some potentially damaging bankruptcy issues could include:

How much these negative financial factors will impact your application will often depend on the position you're applying for and whether you'll need a security clearance.

When Bankruptcy Might Help a Military Enlistment

Struggling to pay a debt that you can't afford can mean years of delinquencies and negative items on your credit report. Often, bankruptcy can help someone improve credit history more quickly.

By eliminating debts through bankruptcy, you can begin building a positive payment history and improve your debt-to-income ratio. If bankruptcy has helped you get your finances under control, and you demonstrate financial restraint after your bankruptcy, you might end up being a more reliable military applicant in the end. You'll be less susceptible to corruption if you need a security clearance.

Another way the military might also view your post-bankruptcy financial rehabilitation in a positive light is that it shows that you were able to solve your financial problems and are capable of self-improvement.

Presenting Bankruptcy in a Favorable Light to Recruiters

If you filed bankruptcy in the past, use it to your advantage when you apply to enlist in the military. Explain to your recruiter and in the FED application, if applicable, the circumstances that caused you to file for bankruptcy. This could be especially compelling if you filed for a reason beyond your control, such as unemployment, divorce, death, or illness.

If the circumstances were within your control, explain why they will not happen again. Most importantly, make clear that your past financial problems will not impact your service in the military.

Meet With a Bankruptcy Lawyer

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 Hiring and Working With a Bankruptcy Lawyer.

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