Special Rules for Military Members in Bankruptcy

Before filing for bankruptcy, you'll likely want to know whether it might affect your security clearance or your ability to enlist in the military if you haven't joined yet. While no hard rule says your security clearance or enlistment chances will be affected by bankruptcy, large amounts of debt might be problematic.

Interestingly enough, certain advantages exist if you're planning to file for bankruptcy, and you're in or have been in the military. For instance, disabled veterans and those on active duty might be entitled to qualification exceptions when filing for Chapter 7 bankruptcy. Learn more about what potential, current, and past military members should know about finances and bankruptcy.

Finances, Bankruptcy, and Military Enlistment

Bankruptcy alone won't prevent you from joining the military. However, you must meet specific financial standards to enlist, and previous economic instability can be problematic. In that regard, bankruptcy can help because taking care of debt problems through bankruptcy can make someone a stronger military candidate.

How Finances Might Affect Your Military Enlistment

Each military branch 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 you're responsible, reliable, and trustworthy. Not only are these commendable traits, but someone who struggles financially can be a security risk because of susceptibility to bribery and embezzlement. This factor will be scrutinized closely if a job requires a security clearance.

You can expect an examination of your credit history, current ability to pay your debts, and ability to support yourself and your family. Some of the factors that might be viewed as a negative 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.

Financial eligibility requirements vary between military branches, and a single determination form doesn't exist. Your recruiter will be the best source of information.

How Bankruptcy Might Affect Your Military Enlistment

It's not the bankruptcy itself that matters, but what it says about your financial circumstances and character. For instance, filing for bankruptcy could be a negative factor if the bankruptcy record revealed some type of wrongdoing, such as a court determination of bankruptcy fraud. But that would be an extreme and unusual case.

In most routine bankruptcy cases, filing demonstrates an ability to solve your financial problems. If bankruptcy has helped you get your finances under control and you demonstrate financial restraint afterward, you'll ultimately be a more reliable military applicant and less susceptible to corruption if you need a security clearance.

Discuss Your Bankruptcy With Military Recruiters

If you filed for bankruptcy in the past, explain the circumstances that caused you to file and ask how it might affect enlistment. It's unlikely to have an impact if you filed for a reason beyond your control, such as unemployment, divorce, death, or illness.

Bankruptcy Benefits for Military Members

If you're in the military and need to file for bankruptcy, some bankruptcy rules could help streamline your filing.

Military Members and the Chapter 7 Means Test Exemption

To qualify for Chapter 7 bankruptcy, you must meet specific income requirements by passing the Chapter 7 means test. However, if you're a disabled veteran, a member of the National Guard, or a Reservist, you might be exempt from the Chapter 7 means test.

The Disabled Veteran Exemption

If you're a veteran with a qualifying disability, you don't have to pass the means test if you incurred debts primarily while on active duty or when performing activities related to homeland defense. You'll qualify by meeting one of the following requirements:

• Your disability rating is at least 30% under the Secretary's disability compensation rules.
• You were discharged or released from active duty after incurring or aggravating your disability while in the line of duty.

Not every disabled veteran injured in the military will qualify for this exception. The rules define "active duty" as full-time military service, including full-time training and military school attendance. Full-time National Guard duty is excluded from this definition.

Veterans benefits will count as income if you aren't exempt from the Chapter 7 means test and must complete it to determine eligibility.

The National Guard or Reserve Exemption

If you are a reservist or member of the National Guard, you can opt out of the means testing requirement if you meet one of the following requirements:

• You were called to active duty after September 11, 2001, for at least 90 days and remain on active duty.
• You were called to active duty after September 11, 2001, for at least 90 days and was released from active duty fewer than 540 days before filing the bankruptcy case.
• You are performing a homeland defense activity for at least 90 days.
• You performed a homeland defense activity for at least 90 days, and it ended fewer than 540 days before filing the bankruptcy case.

Be aware that bankruptcy laws, including exemptions, change on occasion. The simplest way to verify whether means test exemptions are still being offered is by reviewing the Statement of Exemption from Presumption of Abuse Under § 707(b)(2) form.

Protecting Veterans Benefits in Bankruptcy

If you receive veterans benefits—for instance, they're accumulating in your bank account—they might be exempt assets in your bankruptcy. This benefit is valuable because it's challenging to protect cash and bank account funds in bankruptcy using bankruptcy exemptions.

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

However, be aware that you must be able to trace the funds to the benefits, which you won't be able to do if you comingle them with funds from other sources. The most efficient way to protect exempt funds is by keeping exempt funds in a separate account.

Learn more about protecting cash and bank accounts in bankruptcy.

Prebankruptcy Credit Counseling

Most debtors are required to complete consumer credit counseling before filing for bankruptcy. However, if you can't complete the prebankruptcy 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 nonbankruptcy matters, it can also provide an added layer of protection while in bankruptcy. The SCRA can stay, stop, or delay actions 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
• postbankruptcy evictions and collection actions, such as when a creditor is granted relief from the automatic stay.

Meet With a Bankruptcy Lawyer About Military Issues

Talk to an attorney if you have questions regarding bankruptcy, your options, or how your finances may affect your security clearance or military standing. A bankruptcy lawyer can explain the differences between Chapters 7 and 13 and help you determine which would be best for you.