There are two military-related exemptions from the Chapter 7 means test. They are narrow but if you qualify that can be a major advantage.
The Benefit of Avoiding the Means Test
We introduced the “means test” two blog posts ago. This test determines whether you qualify for a Chapter 7 “straight bankruptcy” or instead must do a Chapter 13 “adjustment of debts” case. It’s based on your income, or if your income is not low enough your expenses play a part as well.
Although most people who want to file under Chapter 7 could pass the means test, not everybody could. For them being able to skip the means test can be a very big deal. A Chapter 13 case requires you to pay your debts to the extent your budget allows for a period of 3 to 5 years. In great contrast, a Chapter 7 case usually “discharges” (legally writes off) most debts without you paying anything. And the cases usually only last about 4 months.
So if Chapter 7 is what you need, you can see why skipping the means test could be very important.
Completely Avoiding the “Means Test”
The two exemptions from the “means test” related to military service are:
1) the disabled veteran exemption, and
2) the active duty/homeland defense exemptions.
The law clearly states that under these exemptions you can completely avoid the means test. It says that “the [bankruptcy] court may not dismiss or convert [into Chapter 13] a case based on any form of means testing” if either of these exemptions apply. (See Section 707(b)(2)(D) of the Bankruptcy Code.)
1) The Disabled Veteran Exemption
You can avoid the “means test” under this exemption by meeting two conditions:
First, you are “disabled veteran.” This means that either
a) you are entitled to veteran disability compensation by being least 30% disabled; or
b) you have been discharged from service, or released from active duty, because of “a disability incurred or aggravated in line of duty” (as defined in 38 U.S.C. Section 3741(1)).
Second, your “indebtedness occurred primarily during a period” in which you were either:
a) on “active duty,” meaning “full time duty in the active military service of the United States” (10 U.S.C. Section 101(d)(2)); or
b) “performing a homeland defense activity.” (See definition in 32 U.S.C. Section 901(1).)
On a practical level this second condition seems to be a challenging one.
Think about it. Let’s say you incurred most of your debts before you joined the military, then became disabled while on active duty. So if you then couldn’t pay your debts and needed to file bankruptcy, this exception wouldn’t apply. Your “indebtedness” would not have “occurred primarily” during your active duty but rather before it.
Or let’s say if you didn’t have much debt when you went on active duty. But then you became disabled while on active duty. If you then incurred most of your debt AFTER being released from active duty because of your disability, your “indebtedness” would not have “occurred primarily” during your active duty but rather after it.
In either of these situations you’d still have to pass the means test to go through a Chapter 7 bankruptcy. You don’t if your “indebtedness occurred primarily” while you were on active duty.
2) The Active Duty/Homeland Defense Exemption
This second exemption is much broader. Unlike the above, the timing of your debts in relation to the time of your service does not matter. But this exemption from the means test comes with a very quick deadline to qualify for it.
You are exempt from the means test if at any time after September 11, 2001 you were (or still are) a member of the Armed Forces or the National Guard who served either in active duty or for the homeland defense for a period of at least 90 days. See Section 707(b)(2)(D)(ii) of the Bankruptcy Code.
To use this exemption you must file your Chapter 7 bankruptcy case either:
- during your term of duty, or
- within 540 days (about a year and a half) after it ends.
The disabled veteran exemption requires your indebtedness to have “occurred primarily during” your period of service. With the active duty/homeland defense exemption, to use it you must file your Chapter 7 case during or within 540 days after completing your service. Ask your bankruptcy lawyer whether you can skip the means test by fitting within one of these two exemptions.
Again, even if you don’t think you qualify for either of these exemptions, remember that most people needing to file a Chapter 7 case can pass the “means test” and so don’t really need an exemption from it.