On December 13, 2011, the President signed into law H.R. 2192, the National Guard and Reservist Debt Relief Extension Act of 2011. My dad retired from the Army Reserves as a lieutenant colonel, and we are all aware of the sacrifices made by those on active duty. That’s why I’m happy that this law exempts certain military and homeland defense members from a means-test presumption of abuse in determining eligibility for Chapter 7 bankruptcy relief. In essence, it extends a similar protection that has been in place for a while now. There is, of course, fine print.*
The Chapter 7 means test
We’ve written about the means test before. In a nutshell, absent special circumstances, if a debtor “fails the means test” then he is she is not eligible for a Chapter 7 bankruptcy case. The means test deals with a debtor’s net available income that could be used to make some payment to creditors; if you “fail the means test” it is because you have the financial means to make some payment to your creditors. People generally fail the means test because their net available income is too high. Failing the means test is not the end of the world; it just means that absent special circumstances, these individuals must file a Chapter 13 bankruptcy case and make some partial payment to creditors in order to discharge their debts.
Chapter 13 bankruptcy cases generally last five years, and involve 60 monthly payments to the local Chapter 13 trustee, who then pays creditors. Obviously, a Chapter 7 bankruptcy–with no payment to creditors, and a discharge in about four months– is more attractive than a Chapter 13 bankruptcy. Qualifying military/defense personnel with higher income and debt problems can still qualify for Chapter 7 bankruptcy relief if they file within the 540-day window outlined in the fine print.*
A good bankruptcy attorney can and should assist with calculating these periods of time, and determining whether a client qualifies for this means test exclusion.
*The National Guard and Reservist Debt Relief Extension Act of 2011 exempts, through December 18, 2015, military and homeland defense members from a means-test presumption of abuse in determining eligibility for Chapter 7 bankruptcy relief, if, after September 11, 2001, they were on active duty or performing a homeland defense activity for at least 90 days. The exemption, found in the Bankruptcy Code at 11 U.S.C. § 707(b)(2)(D), expires on the 541st day after the debtor was released from active duty or the performance of the homeland defense activity, giving these folks about a year and a half, after their service, in which to file their bankruptcy case and discharge their debts without worry as to whether their income will be too high to qualify for Chapter 7.