You qualify for Chapter 7 without needing to take or pass the “means test” if you fit within these admittedly narrow military exemptions.
The Benefit of Avoiding the “Means Test”
A few months ago we explained why most people who want to file a Chapter 7 case easily qualify to do so by passing the “means test.” (See Bankruptcy by Example: Pass the “Means Test” the Easy Way.) They pass it in most situations simply by having low enough income—no more than the published “median income” amounts for their state and family size.
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, while a Chapter 7 case usually “discharges” (legally writes off) most debts, and does so in a matter of 3 or 4 months, usually without needing to make any payment. So you can see why for many people Chapter 7 is 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.
There are two ways to do that related to military service: the disabled veteran and the active duty/homeland defense exemptions to the “means test.”
These Exceptions Totally Avoid the “Means Test”
The Bankruptcy Code states directly that “the [bankruptcy] court may not dismiss or convert a case based on any form of means testing” IF these exemptions apply. That means you get to totally skip the “means test.”
But that’s a big “IF” because these exemptions are quite narrow.
The Disabled Veteran Exemption
The conditions for avoiding the “means test” as a disabled veteran are:
1) Be a “disabled veteran,” meaning:
a) be entitled to veteran disability compensation for at least 30% disability, or
b) have been discharged from service, or released from active duty, because of “a disability incurred or aggravated in line of duty,” AND
2) Your “indebtedness occurred primarily during a period” in which you were either on active duty or “performing a homeland defense activity.”
This second condition in particular is a particularly tight one. If you incurred most of your debts BEFORE you went on active duty and could afford to make payments on the debts because of the income you were making then, 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, but then ran up a bunch of debt AFTER being released from active duty because of your disability, this exception would not apply for the same reason. Doesn’t seem fair but that’s the law.
The Active Duty/Homeland Defense Exemption
This second exemption is broader. BUT it has a short deadline to qualify for it.
You are exempt from the “means test” if you are, or were after September 11, 2011, 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 this exemption can only be used if your Chapter 7 bankruptcy case is filed DURING your term of duty OR DURING the period of 540 days (about a year and a half) after it ends.
Furthermore, this particular exemption currently expires after December 18, 2015.
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 applies only if you file bankruptcy during or within 540 days after completing your service.
If you now realize that you do qualify under one of these exemptions, please contact us to schedule a consultation meeting. But if it seems that you don’t qualify for either of them, please remember what we said at the beginning of this blog post—most people needing to file a Chapter 7 case easily pass the “means test” and so don’t need these exemptions from it. We can determine for you whether you qualify for Chapter 7 either way.