When veterans and members of our National Guard, Reserves, and active duty military experience financial trouble, it is often made worse by the rigors of life in the service. It is an ugly reality that many creditors simply cannot be bothered to help servicemembers or vets when deployments or even injuries take their financial toll. In fact, some creditors make a living by preying on servicemembers, as I have seen in my Philadelphia bankruptcy and debt negotiation practice. Fortunately, there are some specific protections afforded to servicemembers and veterans under the Bankruptcy Code and other federal statutes, such as the Servicemembers Civil Relief Act and the National Guard and Reservists Relief Act.
Servicemembers Civil Relief Act
The Servicemembers Civil Relief Act (“SCRA”) gives servicemembers a reprieve from difficult financial situations that can arise while they are on active duty. Some of those protections include the right to do the following:
- Set aside default judgments;
- Stay (suspend) certain civil lawsuits and administrative matters;
- Limit the amount of interest a creditor may charge on debts arising prior to active duty (generally to 6%);
- Stop a landlord from evicting a service member or dependents of a servicemember for nonpayment of rent for up to three months (and receive additional relief from the court);
- Terminate a residential lease entered into before active duty upon beginning active duty;
- Terminate a residential lease entered into during active duty, if the servicemember receives a Permanent Change of Station (PCS) or is deployed for 90 days or more, and the rent is below a set amount (currently $2975.54);
- Terminate a car lease signed before active duty, if the servicemember is activated for more than 180 days;
- Terminate a car lease signed during active duty, if the servicemember receives a PCS for overseas or is deployed overseas for 180 days;
- Terminate a cell phone contract, if deployed for at least 90 days (if the phone cannot be used in the new location);
- Stop a creditor from repossessing property under an installment contract (such as a car loan) without a court order; and
- Stop a foreclosure against a servicemember’s residence for at least 9 months after the end of active duty (and, in some cases, the sale or seizure of the property may be overturned).
This act also provides other benefits, such as tax relief, suspension of health insurance while on active duty (with guaranteed reinstatement upon return), and suspension of some life insurance premiums.
Most of these protections are in place while the debtor is on active duty and for sixty days thereafter. However, none of these rights are automatic. In order to assert rights under this act to terminate leases and contracts, the servicemember must write to the creditor and enclose a copy of his or her orders. When a legal action is involved, such as an eviction or other law suit, the servicemember must petition the court for relief. Moreover, there are restrictions under this act. For example, some protections apply only to debts that the servicemember incurred prior to going on active duty. In the case of a residential or auto lease, additional individuals who signed the lease (other than the servicemember and spouse) may not be released from their obligations.
Note: The Protecting Servicemembers from Mortgage Abuses Act is working its way through Congress. It would double the penalties for banks who violate the law by foreclosing on active duty service members and extend the foreclosure protection of the SCRA from nine months to twenty-four months.
National Guard and Reservists Debt Relief Act of 2008
The National Guard and Reservists Debt Relief Act of 2008 exempts active duty members of the National Guard or Reserves from the bankruptcy means test. Under this act, members of the National Guard and Reserves who are called to active or homeland security duty for 90 days or more are excused from the test for the entire time they are on active duty and for 540 days after their active duty ends. This exception is important because the bankruptcy means test looks at the average of your previous six months of income to determine if you qualify for Chapter 7. Activated reservists and Guard members often experience a drastic drop in income. By looking only at servicemembers’ current income, this exception prevents them from being forced into an unworkable Chapter 13 plan.
The Bankruptcy Code’s Provisions Applying to Servicemembers and Veterans
Disabled veterans exempt from the bankruptcy means test. Under the Bankruptcy code, disabled vets are exempt from means test if they meet a specific definition of disability. (11 U.S.C. § 707(b)(2)(D)) To qualify, the vet must be either (a) rated by the Veteran’s Administrations as at least 30% disabled or (b) discharged as a result of a disability incurred in the line of duty. (38 U.S.C. 3741(1))
Veterans benefits exempt in bankruptcy. On the federal level, veterans benefits are exempt property in bankruptcy, meaning that creditors cannot get to them. (11 U.S.C. 522(d)(10)(B)) This exemption applies in states like Pennsylvania that allow the use of federal exemptions in bankruptcy. In addition, Pennsylvania has an exemption for veterans benefits under state law. This exemption can be useful in protecting assets from a creditor who obtains a judgment and attempts to levy a bank account.
Note: Older retired vets may find that there are other provisions of the Bankruptcy Code and state law applicable to seniors that offer additional protection.
Credit counseling course requirement in bankruptcy waived for servicemembers in combat zone. Sevicemembers on active duty in a combat zone can receive a waiver of the credit counseling course required under the bankruptcy code. The servicemember must file a motion to obtain the waiver, but most judges will grant the request. (11 U.S.C. 109(h)(4))
Although this post does not address all of the nuances of this legislation, it can serve as a starting point for both active servicemembers and veterans who are experiencing tough financial times. Hopefully, Congress will pass legislation giving those serving in our Army, Navy, Air Force, Marines, Coast Guard, National Guard, and Reserves even greater protections in the near future.