Veterans and Bankruptcy – What Do I Need to Know and Will I Lose My Benefits

Hundreds of thousands of veterans fall into serious financial difficulties each year, and many consider bankruptcy protection as one of their options. While just 10% of the total U.S. population are veterans, nearly 15% of those who file for bankruptcy are in this class. But, Chapter 7 bankruptcy has certain requirements, such as passing a “means test.” So, it’s a valid concern if you’re a veteran that some of your VA benefits might be in jeopardy. 

In fact, there are special bankruptcy rules that apply to active duty military and disabled veterans. If you believe that personal bankruptcy might be the best solution to your financial troubles, here is what you need to know. 

Military Members and the Means Test Exemption

The “means test” is a way to determine whether you are qualified for a Chapter 7 “straight bankruptcy” versus a Chapter 13 “adjustment bankruptcy.” It is based on your income and monthly expenses. The means test is a big deal because many people would rather file under Chapter 7, but some may not qualify because of their income. 

One of the ways to avoid taking the means test is having an active duty/homeland defense exemption. According to the U.S. Bankruptcy Code, you do not have to take the means test if, at any time after September 11, 2001, you were or still are a member of the National Guard or Armed Forces who served for the homeland defense or on active duty for at least 90 days. To qualify, you must file your Chapter 7 bankruptcy case either while still on active duty or within 540 days after your duty ends. 

Disabled Veterans and the Means Test Exemption

Another way to avoid the means test is to meet some strict requirements related to veteran disability compensation. Specifically, the U.S. Bankruptcy Code states that you do not have to take the means test if:

• You are at least 30% disabled and collect veteran disability compensation; or
• You were released from active duty or discharged from service due to a disability incurred or aggravated in the line of duty. 

AND

Your financial troubles must have happened during a period in which:

• You were performing a homeland defense activity; or
• On activity duty. 

Unfortunately, these are some strict requirements that not many veterans would be able to meet. The good news is that the rules related to the means test were updated several years ago, making it easier for veterans to get the financial relief they need and deserve. 

Excluding VA Benefits in the Means Test Through the HAVEN Act

Since the 1990s, the number of U.S. military veterans receiving disability benefits has doubled. There are now roughly 4.75 million vets receiving disability payments, and more than 100,000 vets file for bankruptcy protection annually. 

Since many veterans didn’t fit into the strict exclusions established by the U.S. Bankruptcy Code, their disability benefits were considered disposable income under the means test. Not only did this disqualify them for Chapter 7 bankruptcy, but it forced them into Chapter 13 bankruptcy and took some of those benefits to pay off creditors. 

In 2019, a bipartisan effort in Congress passed the Honoring American Veterans in Extreme Need Act, or HAVEN Act. This Act amended the Bankruptcy Code to exclude many benefits from a debtors’ monthly income during the means test. 

Under the HAVEN Act, any benefits that a person receives from the U.S. Department of Veterans Affairs (VA) or the U.S. Department of Defense (DoD) do not need to be considered in the means test. This makes it much easier for someone having financial difficulty to qualify for Chapter 7 bankruptcy and have their debts discharged quicker. 

There are a few limitations to the HAVEN Act. The exemption may not apply if the veteran:

• Receives retirement benefits as well as temporary disability benefits; 
• Receives special compensation payments monthly from the DoD; or
• Has enough disposable income to pay at least one-quarter of their debt over five years. 

In addition to relief through the HAVEN Act, your state’s bankruptcy exemption laws might provide some protection for veteran’s benefits. And the Servicemembers Credit Relief Act (SCRA) provides additional relief to servicemembers from various debt collection actions, both inside and outside bankruptcy. 

If you are a current or former servicemember who needs financial relief, a trustworthy bankruptcy attorney can answer your questions and guide you through this process. Gulf Coast Bankruptcy is committed to providing people with the resources they need to make informed decisions about their financial future.