Practical Bankruptcy: The Disabled Veteran, Active Duty, and Homeland Defense Exemptions from the “Means Test”
Skip the “means test” and qualify for Chapter 7 if you fit within these military-related exemptions. But they ARE narrow ones.
The Bankruptcy Code makes it quite clear: if these exemptions apply then “the [bankruptcy] court may not dismiss or convert a case based on any form of means testing.” (See Section 707(b)(2)(D).)
But these exemptions are quite narrow, with conditions that are harder to meet than seems appropriate.
The Disabled Veteran Exemption to the Means Test
To be able to avoid the means test as a disabled veteran you have to jump through these hoops:
1) Be a “disabled veteran” by:
a) Being entitled to veteran disability compensation for at least 30% disability, or
b) Having been discharged from service, or released from active duty, because of “a disability incurred or aggravated in line of duty.”
2) Your “indebtedness incurred primarily during a period” in which you were either on active duty or “performing a homeland defense activity.”
This second condition in particular can be a tough one. To illustrate this, look at these two examples:
1) Let’s say you incurred most of your debt before you went on active duty—such as by financing a vehicle and furniture for your family, and incurring some credit card debt. Then you went on active duty, and you and your family tried to be prudent by not incurring much debt during your absence. Then you become disabled during your active duty. You get discharged, and then file a Chapter 7 bankruptcy to deal with your prior debt, which you can’t pay in part because of your disability. Because you signed onto most of your debt before and not during your active duty, this disabled veteran exemption does not apply to you.
2) Or let’s say that you had very little debt before starting your active duty, and also did not incur much during the period of your active duty. You become disabled during your active duty. But then after being discharged and while waiting for your disability determination to be processed, you run up a lot of debt trying to keep your head above water. Here, at least in part your debt was incurred because of your military service and your disability, as was your inability to pay it. So you’d think that surely this exemption should help you. But because most of your debt happened after and not during your active duty, this disabled veteran exemption does not apply to you.
In both these examples, since your “indebtedness [was not] incurred primarily during a period” of active duty, to be in a Chapter 7 case you have to qualify by going through the means test just like everyone else. This “disabled veteran” exemption created by Congress is certainly narrow and stingy.
The Active Duty and Homeland Defense Exemptions to the Means Test
Well, maybe these other somewhat related exemptions might help.
If you are or were a member of the Armed Forces or the National Guard who for at least a period of 90 days served either in active duty or for the homeland defense, then you may be exempt from the means test through these exemptions.
The good news is that, unlike the disabled veteran exemption above, when you incurred your debts does not matter for these exemptions.
The bad news is that these exemptions are very temporary. They are in effect only during your term of duty and for period of 540 days (slightly less than a year and a half) after its end. This may give you an extra incentive to file bankruptcy sooner rather than later.
Congress decided to treat you with a little extra respect during your term of duty and for 540 days after your term ends. File a Chapter 7 bankruptcy case during that time and you don’t have to take the means test. But starting on the 541st day, you are treated with no more respect than everybody else.
Some people presumably do qualify for and benefit from these military-related exemptions to the means test. But so many disabled veterans do not qualify simply because of when their debts happened to have been incurred. And so many formerly active duty/homeland security military personnel do not qualify because they happen not to get around to filing their Chapter 7 case until more than 540 days after their term of duty. For these folks these restrictive exemptions will undoubtedly feel like empty platitudes not backed up by any practical help.
However, it is only fair to emphasize that most people do not NEED an exemption from the means test. Most people—military and otherwise—don’t have enough income for the means test to stop them from filing a successful Chapter 7 case. (See our second-to-last blog post about this.) So even if you don’t fit within these restrictive military-related exemptions and thus are subjected to the means test, there is a good chance that you’ll pass it with flying colors.