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.
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.
While there is no hard rule that says your security clearance will be affected by bankruptcy, large amounts of debt may. Issues with your security clearance are usually made on a case-by-case basis, so it may be worthwhile to look into it with a trusted superior.
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.
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
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.
At the time the above information was posted, it was current.
Keep in mind that as time marches on, these rules could change.
Will Bankruptcy Affect My Ability to Enlist in the Military?
Your bankruptcy, by itself, won’t preclude enlistment in the military. But negative financial circumstances might.
In order to join the military, you must meet certain financial standards. If you’ve got a bankruptcy in your past, this, by itself, will not prevent you from joining the military. However, the circumstances underlying your bankruptcy filing might cause the military to look with disfavor on your situation. On the flip side, in some situations, a bankruptcy might make someone a stronger military candidate.
Read on to learn why the military cares about your finances, what types of things the military is on the lookout for, and how the circumstances underlying your bankruptcy might hurt or help you enlistment application.
Your Finances Matter in the Military
The Department of Defense requires that “members of the Military Services are expected to pay their just financial obligations in a proper and timely manner.” To that end, each branch of the military has its own recruitment criteria that will take your financial background into consideration.
Why does the military care about your finances? The military wants to find out if you are responsible, reliable and trustworthy, and it believes that your financial background is in indicator of these personality traits. It also wants to make sure that you can live on a military salary.
At some point during the recruitment process, the military will review your financial background. You may 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 and current ability to pay your debts and 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 Matter
It’s not so much the bankruptcy itself that matters, but what it says about your financial circumstances and your character. Some bankruptcies may reflect negatively on the applicant, others may not.
Circumstances Surrounding Bankruptcy That Might Hurt Your Application
If the circumstances of your bankruptcy were less-than-honorable, then it may be a negative factor. Some potentially damaging bankruptcy issues may include:
• you filed for bankruptcy multiple times
• you discharged certain types of debts, such as gambling debts, taxes, or debts for luxury items
• the court denied your discharge or dismissed your bankruptcy case, or
• you relapsed into bad financial behavior post-bankruptcy, such as incurring payment delinquencies or a high debt-to-income ratio.
How much these negative financial factors will impact your application often depends on the type of position you are applying for and whether you’ll need a security clearance
When Bankruptcy Might Make You a Stronger Applicant
Often, bankruptcy enables people to improve their credit histories more quickly. Struggling to pay debt that you can’t afford can mean years of delinquencies and negative items on your credit report. By eliminating debts through bankruptcy, you can begin building positive payment history and improve your debt-to-income ratio. If bankruptcy has helped you get your finances under control, you may end up being a stronger military applicant in the long run.
The military may also view your post-bankruptcy financial rehabilitation as a good thing. It shows that you were able to solve your financial problems and are capable of self-improvement.
How to Present Your Bankruptcy in the Most Favorable Light
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 bankruptcy, especially if they were 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 important, make clear that your past financial problems will not impact your service in the military.