Are you struggling to make ends meet? Are you already behind on some bills and creditors are harassing you? Are you facing foreclosure or car repossession?
You are not alone. Many people just like you have fallen on hard times because of divorce, medical catastrophe, job loss, or simply not having enough income to meet current expenses. Active-duty servicemembers and veterans are not immune to these problems--a recent study showed that 1 in 10 military families file bankruptcy.
There are pros and cons to filing bankruptcy for anyone, but there are special considerations for those who served or are serving in the military. Read on to find out your options and decide what is best for you and your family.
If you simply have too much unsecured debt--such as credit card debt or medical debt--filing under Chapter 7 is for you. Chapter 7 bankruptcy is a four-to-six month process during which you disclose all of your income, expenses, assets, and debts. Afterward, the court issues an order “discharging” your unsecured debt. Discharge means you are no longer personally responsible for that debt, and no creditor can try to collect it in the future.
Chapter 7 is also useful if you have to surrender a house or a car because you are discharged from the underlying debt and any account deficiency once the car or house is sold by the lender.
If you are behind on your car loan or mortgage and need a way to catch up, Chapter 13 is for you. Chapter 13 bankruptcy is a 3 or 5-year monthly repayment plan where you make small monthly payments to the Chapter 13 Trustee--who repays your creditor(s). After the plan is complete, you receive a discharge of unsecured debt.
Chapter 13 is especially helpful if you have a second mortgage and your home is worth less than the amount of the first mortgage. Under these circumstances, you can “strip off” the second mortgage as unsecured and have it discharged.
Chapter 13 is also beneficial if you owe on a car loan that is greater than what the car is worth. The car can be “crammed down” to current market value and the interest rate can also be lowered. The car lender would be paid through your Chapter 13 plan and at the end of the plan, you would own the car.
You may be concerned about the effect a bankruptcy filing will have on your security clearance.
The military requires that personnel with a security clearance be “financially responsible.” For this reason, if you filed for bankruptcy due to a one-time financial event--such as divorce--there will likely be no impact on your security clearance.
However, if you filed bankruptcy due to irresponsible financial management--such as running up your credit cards with luxury purchases, or if you filed because of a criminal conviction (such as DUI in some states)--this may affect your security clearance. But that unpaid debt and delinquent accounts can also impact your security clearance because of the risk you could be bribed or otherwise compromised to get out of that debt.
If you are a veteran with a 30% or higher disability rating and your debt was incurred during your service in the military, you can skip the Chapter 7 “means test”--which determines if one is income-qualified to file bankruptcy under Chapter 7. This means that all veterans with a 30% or higher disability rating are automatically eligible to file a Chapter 7 bankruptcy petition.
Under certain circumstances, reservists and National Guard members called to active duty may also be excluded from means-testing.
The Servicemembers’ Civil Relief Act (SCRA) provides the active-duty military with protection in civil actions in which they are defendants. The SCRA allows courts to “stay” (postpone) litigation against servicemembers while on active duty.
This means that while you may be struggling with unpaid debt, any creditor suing you will have that litigation stayed. This buys some time to figure out your next move--whether bankruptcy or another form of debt relief.
About the Author
Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia. She frequently works with David M. Offen, Esq., a busy bankruptcy attorney in Philadelphia.