Veterans in bankruptcy face enough challenges. One such challenge no longer exists.
The federal government on August 23, 2019 enacted the Honoring American Veterans in Extreme Need Act of 2019. Also known as “HAVEN” the law amends Section 101(10A) of the U.S. Bankruptcy Code. As a result, Veterans Administration and Department of Defense Disability benefits paid out to veterans or their dependent survivors are no longer used in calculating monthly income for bankruptcy means testing to determine if one is eligible to file a Chapter 7 Bankruptcy.
First of all, means testing and bankruptcy require a quick review. Back in 2005 Congress decided to make Chapter 7 Bankruptcy just a tad harder for ordinary people in financial distress. Means testing meant that people who made too much money would not qualify for Chapter 7 bankruptcy. Instead, means testing forced those with higher income into filing a Chapter 13. So, Chapter 13 required paying a percentage of debt through a payment plan. That was the idea anyhow.
So the means test takes certain income and compares it to medium family income, or “MFI”. The U.S. Census Bureau generates MFI numbers. People whose income exceeded the MFI faced a second step. Their income went through a more complex “means test” set of numbers to see if they qualified under Chapter 7.
Why Bankruptcy Law Changed to Help Veterans
Most noteworthy, certain forms of income enjoyed an exclusion from the means test. For example, social security benefits did not have to be included in figuring whether a potential bankruptcy filer qualified. Now, you might think most people on social security benefits have so little income they would qualify anyhow. But that wasn’t always true. If social security provided only one source of a household’s overall monthly income, kicking it out of the means test provided a big plus. So, people receiving social security had an advantage in means testing.
Veterans, those who put their lives on the line to perform their duty in the military, did not get that leg up on the means test. The test required inclusion of various veteran’s benefits in calculating whether or not they qualified to file under Chapter 7.
But all that changed with the HAVEN Act. Going forward, bankruptcy law treats veterans benefits like Social Security benefits, with both now exempted from means testing. Before the change veterans were more often pushed into Chapter 13 filings than those receiving Social Security.
The change represents a significant move. Veterans made up a full 125,000 bankruptcy filings in the year 2017. Veterans Administration numbers confirm that 4.74 million U.S. veterans receive various V.A. benefits. That number represents 25% of the total U.S. veteran population.
Veterans Benefits Now Exempt from Bankruptcy Means Test
So what actual veterans become exempt from means testing for bankruptcy purposes under the Haven Act? We list them here:
- Permanent Disability Retired Pay
- Temporary Disability Retired Pay
- Retired or Disability Severance Pay for Pre-Existing Condition
- Combat Related Special Compensation
- Special Survivor Indemnity Allowance
- Special Compensation for Assistance with Activities of Daily Living
- VA Veterans Disability Compensation
- Disability Severance Pay
- VA Dependency and Indemnity Compensation
- Survivor Benefit Plan for Chapter 61 Retirees
- VA Veterans Pension
So the law excludes these benefits from means testing. Don’t confuse this with another advantage for veterans in bankruptcy. Means testing never applied to disabled veterans who incurred most of their debts while on active military duty. The original means test law exempted veterans whose debts were primarily incurred while on active duty or performing a homeland defense activity. Those veterans could skip over the means test in their bankruptcy papers.
The new law came after bankruptcy attorneys pointed out the unequal treatment of Social Security and veterans benefits. Appeals challenged the apparent unfairness. At the same time a number of courts upheld the seeming unfairness of that disparity. As a result the Haven Act came about, exempting the above veterans benefits from means testing.
For more information on Bankruptcy Means Testing click here.
The Author, Attorney Andrew D. Myers, represents those filing for bankruptcy in New Hampshire and Massachusetts.
Haven Act – Frequently Asked Questions, U.S. Trustee, Justice.com, August 22, 2019.
Haven Act Provides Military Veterans With Increased Income Protections in Bankruptcy, Jill Waters, The National Law Review, Sept. 9, 2019.
11 U.S.C. § 707. Presumptive Abuse, Dismissal & Means Testing in U.S. Bankruptcy Code; 11 U.S.C. Sec. 707 .