Bankruptcy for Military Personnel

Learn about some special bankruptcy rules that apply to military members.

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If you are in the military, you have the same right to file for bankruptcy relief as a civilian. In fact, active-duty military personnel and disabled veterans enjoy certain benefits over non-military bankruptcy debtors. However, filing for bankruptcy also has the potential to affect your security clearance under certain circumstances.

Read on to learn more about filing for bankruptcy if you are a member of the military.

Servicemembers’ Civil Relief Act Provides Legal Protection for Active-Duty Personnel

The Servicemembers’ Civil Relief Act (SCRA) provides active-duty military members many legal protections in civil actions initiated against them. In fact, the SCRA gives courts the right to stay or postpone both bankruptcy and non-bankruptcy proceedings against military personnel while on active duty. Further, the protections afforded by the SCRA are separate from and in addition to the automatic stay provided by bankruptcy.

There are other protections offered by the SCRA. To learn more, see Legal Protections for America's Military: The Servicemembers' Civil Relief Act.

Disabled Veterans Are Exempt from the Chapter 7 Means Test

In order to qualify for Chapter 7 bankruptcy, debtors must normally pass a means test. The means test was created to disqualify debtors who have sufficient disposable income to pay back a portion of their debts from filing for Chapter 7. (To learn about the means test, how it works, and the exceptions to it, see The Chapter 7 Means Test.)

However, if you are a disabled veteran and your debts were incurred primarily while you were on active duty or performing a homeland defense activity, you are not required to complete the means test to qualify for Chapter 7 bankruptcy. To be considered a disabled veteran for means test purposes, you need to have a disability rated at 30% or more, or be discharged from active duty because of a disability suffered or aggravated in the line of duty.

Reservists and National Guard Members Called to Active Duty May Be Excluded from Means Testing

Members of the National Guard or a reserve unit of the Armed Forces who were called to active duty or performed a homeland defense activity for a period of at least 90 days after September 11, 2001 are excluded from Chapter 7 means testing requirements while on active duty and for 540 days afterwards.

However, this exclusion is usually temporary. You are still required to complete the means test form no later than 14 days after your 540-day exclusion period ends, unless time has already expired for filing a motion to argue a means test presumption during your exclusion period.

Filing for Bankruptcy May Affect Your Security Clearance

Filing for bankruptcy does not automatically affect your security clearance. Whether your security clearance will be affected depends on a variety of factors including why you had to file for bankruptcy, your job performance, and even your relationship with co-workers and superiors.

Having large amounts of outstanding debt may also jeopardize your security clearance. In some cases, filing for bankruptcy can actually help you because it may be viewed as taking a positive step towards financial responsibility. However, determinations regarding security clearances are usually made on a case by case basis. As a result, prior to filing, you should check to make sure your security clearance will not be adversely affected by your bankruptcy.

(To learn about other protections for those serving in the military, visit our topic page on Special Protections for the Military: Bankruptcy, Foreclosure & Debt Collection.)

by: , Attorney

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