Can I file Bankruptcy while in the Military?

Those in the military have the same right as any to file for bankruptcy relief and actually enjoy certain benefits over civilian debtors. On the other hand, filing for bankruptcy can also affect your security clearance in some situations.

Service members are offered federal protection in civil actions thanks to the Service-member’s Civil Relief Act, or SCRA. This act allows courts the right to put a stay or postpone bankruptcy and non-bankruptcy proceedings being taken against military personnel while they are on active duty. These protections are separate from the automatic stay normally provided by bankruptcies.

Exemptions from Means Testing

Normally, those looking to qualify for Chapter 7 bankruptcy need to pass a means test in order to disqualify those debtors who have enough disposable income to repay part of their debts from filing for bankruptcy. Disabled veterans, however, who have debts which were incurred mainly while on active duty, are not required to complete such a means test to qualify for Chapter 7.

Furthermore, National Guard members and reserve units of the armed forces who were called up for at least 90 days after September 11, 2001 are also excluded form a Chapter 7 means test while on active duty and for 540 days afterwards. Those who qualify must still complete the means test form no more than 14 days after the beginning of the 540-day exclusion period.

While your security clearance will not be affected automatically by filing for bankruptcy, it can factor into a decision regarding your clearance along with your job performance and relationships with superiors and coworkers.

Clearance decisions are made on a case by case basis but having a considerable amount of debt can be seen as a negative to your superiors. You should inquire into how your clearance may be affected before you even file for bankruptcy.

Kostopoulos Bankruptcy Law, our Oakland bankruptcy lawyers help clients in financial distress make important and positive decision to help manage their debt. If you are in the military currently or a veteran, speak with our firm for legal counsel!

The Bankruptcy Means Test

What Is the Bankruptcy Means Test Used For?

Section 707(b)(2) of the Bankruptcy Code applies what is called a “means test” to determine whether a debtor’s filing of a Chapter 7 would be presumed an abuse of the Bankruptcy Code, thereby requiring a conversion of the case to a Chapter 13.

Essentially, the “means test” was created to determine whether a debtor’s income is low enough to qualify for a Chapter 7 bankruptcy. This formula was designed to keep debtors with higher incomes from filing a Chapter 7 bankruptcy. High income debtors who fail the means test must file a Chapter 13 bankruptcy, which allows them to repay a portion of debts over a period of 3 to 5 years, but they may not use the Chapter 7 to wipe out their unsecured debts altogether.

How to Pass the Means Test

Passing the means test does not mean that you have to be penniless to qualify for a Chapter 7. You can earn a significant amount of income and still pass the means test providing you have a lot of expenses.

Some expenses that might help you pass the means test can include:

  • Large mortgage payment
  • Large car payments
  • Tax obligations
  • Court-ordered payments such as alimony or child support
  • Out-of-pocket healthcare expenses
  • Care for disabled, ill or elderly household members
  • Other expenses incurred due to special circumstances

The means test was specifically designed to limit the use of the Chapter 7 bankruptcy to those individuals who truly cannot afford to repay their debts. The means test deducts specific monthly expenses from the debtor’s current monthly income (the debtor’s average income over the six months prior to filing for bankruptcy) to arrive at the debtor’s disposable income. The more disposable income, the less likely the debtor will qualify for a Chapter 7.

Can Business Debts Be Used?

The means test only applies to bankruptcy filers with primarily consumer debts and not business debts. When taking the means test, your Oakland bankruptcy attorney will first determine whether your income is above or below the median income of the state of California.

If your current monthly income is less than the median income for a household of your size in California, you automatically pass and you’re done and you can file a Chapter 7. However, if your median income is higher than the threshold, your attorney will have to determine if you have enough left over to repay some of your debt.

Find Out Your Eligibility

At Kostopoulos Bankruptcy Law, we can help you apply the bankruptcy means test in order to determine if you qualify for a Chapter 7 bankruptcy. Our founder, attorney Rita Kostopoulos is a certified consumer bankruptcy specialist by the American Board of Certification and our firm was named among the Top 100 Firms by Debt Education and Certification Foundation (DECAF). We can sit down with you and determine if bankruptcy is right for you and if so, which Chapter you qualify for.

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