Military Has More Bankruptcy Options & Protection From Debt Collectors

Sacramento is proudly home to many military families. From Travis Air Force Base and McClellan Air Force Base alone, there are many active duty personnel living in the area. For these hard-working folks who sacrifice so much, dealing with debt problems can be very difficult. Fortunately, military personnel have the same right to file bankruptcy as any civilian. They even have some additional protections from debt collectors that non-military folks do not.

One of the standard prerequisites for filing Chapter 7 bankruptcy is the Means Test. Under the Means Test, a debtor may be disqualified from filing Chapter 7 if they have sufficient disposable income to pay back a portion of the debts. “Failing” the means test requires debtors to file Chapter 13 instead, which is a good solution for many people, but takes longer and requires the debtor to pay back a portion of their debts. With all that in mind, if a debtor is a disabled veteran whose debts were incurred primarily while he was on active duty or performing homeland defense, he is not required to complete the Means Test to qualify for Chapter 7. As defined in this context, a disabled veteran is one whose disability is rated at 30 percent or more or who was discharged from active duty because of a disability suffered in the line of duty.

Service members have various levels of security clearance. Whether their security clearance is affected depends on a lot of factors. Filing for bankruptcy doesn’t automatically affect clearance, but it could. On the other hand, it could actually help. Service members with large amount of debt could find their security clearance in jeopardy. In some of those cases, bankruptcy would get rid of that debt and show that the service member is taking control of her finances.

Outside of bankruptcy, there are other protections from debt collectors for military personnel, like the Servicemembers Civil Relief Act, or SCRA. The SCRA protects active-duty service members in their financial dealings. One of the most powerful provisions is that car lenders are prohibited from repossessing a vehicle without a court order.

The law also makes it against the law to disclose a debt to a service member’s chain of command. Debt collectors are just not allowed to disclose a debt to a third party. Superior officers fall into the category of “third party.” Sometimes the debt collector will say the service member gave permission to contact their superior officer, but that is usually buried in the fine print of the contract. That would be considered an unfair practice, which is also against the law.

Under the Uniform Code of Military Justice, there are provisions that could impose disciplinary action for failure to pay a just financial obligation. Fortunately, bankruptcy is a federal right under the U.S. Constitution. Since indebtedness is often unavoidable and bankruptcy is a right, bankruptcy can be a powerful tool to make sure that our service members are in a position to take financial control of their lives, during and after service.