The Military Exemptions from the Chapter 7 “Means Test”

You qualify for Chapter 7 without having to pass the “means test” if you fit within these very specific military-related exemptions. 

 

Short Introduction to the “Means Test”

The “means test” determines whether you have enough income after your expenses to pay a meaningful amount back to your creditors. If you do, you don’t pass the “means test” and you don’t qualify for Chapter 7 “straight bankruptcy.”

But like many people who want to file a Chapter 7 case, you may easily pass this test simply by having low enough income. As long as your income is no more than the current published “median income” amounts for their state and family size (as being updated on April 1, 2016), you don’t have to consider the amount of your expenses—you automatically qualify for Chapter 7.

Even if your income is higher than the applicable “median” amount, you can often still pass the “means test” by having enough allowed expenses so that your disposable income is low enough.  And then even if you have too much disposable income you might still pass the “means test” by showing “special circumstances.”

The Advantage of Skipping the “Means Test”

But not everybody passes the “means test.” If not, their cases are either “dismissed” (thrown out) or changed into a Chapter 13 “adjustment of debts” case. A Chapter 13 case requires paying creditors as much as your budget allows for a period of 3 to 5 years. That’s in great contrast to a Chapter 7 case which usually “discharges” (legally writes off) most debts without any payment, and usually does so in about 4 months.

So it’s understandable why Chapter 7 can be a much better way to go than Chapter 13. And that’s why having a way to avoid the “means test” altogether could be very valuable.

Totally Avoiding the “Means Test”

There are two ways to avoid the “means test” related to military service: the disabled veteran and the active duty/homeland defense exemptions.

The Bankruptcy Code makes clear that under these exemptions you can completely avoid the “means test.” It states 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.)

The Disabled Veteran Exemption

You can avoid the “means test” if you are:

1) a “disabled veteran,” meaning:

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)), AND

2) 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 is a particularly tough one. If you incurred most of your debts BEFORE you went on active duty, but then became disabled during active duty and as a result 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.

Or if you didn’t have much debt when you went on active duty, but became injured and disabled while on active duty and then incurred most of your debt AFTER being released from active duty because of your disability, this exception would not apply for the same reason.

On the other hand you may well not need the exemption in these situations because your income would likely be less than your state and family size’s “median income.” If so, you’d easily pass the “means test” and qualify for Chapter 7.

The Active Duty/Homeland Defense Exemption

This second exemption is somewhat broader. But careful because it has a quick deadline to qualify for it.

You may be 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.

Unlike the above disabled veteran exemption, it doesn’t matter when your debts occurred in relation to the time of your service.  

However to use this exemption you must file your Chapter 7 bankruptcy case either during your term of duty or within the period of 540 days (about a year and a half) after it ends.

Conclusion

The disabled veteran exemption is narrow because your indebtedness must have “occurred primarily during” your period of service. The active duty/homeland defense exemption is broader but you must file your Chapter 7 case during or within 540 days after completing your service.

Even if you don’t think you qualify for these exemptions, please remember that most people needing to file a Chapter 7 case can pass the “means test” and so don’t really need these exemptions from it.