Disabled Veterans Benefit from Bankruptcy Reform

Big News for Disabled Veterans in Bankruptcy. However, first a little background.

In 2005 when biggest bankruptcy reform act in history took place, Congress and our President specifically excluded Social Security Income from the Chapter 7 qualification test also known as the Bankruptcy Means Test. We all drew a deep breath and exhaled a massive collective national sigh of relief that older Americans on fixed incomes and folks on permanent Federal Disability income were given additional protections from creditors. Who didn’t see this as an excellent new thing in the law? 

But what didn’t they do? VA Disability or Veterans Administration Disability was not excluded from the Bankruptcy Means Test. What kind of poop was that? Stupid stupid stupid. That was 2005. It took Congress fourteen (14) years to get around to fixing this with the HAVEN Act when the President signed it into law on August 23rd, 2019. 

Okay, the Veterans Administration Code does state that no creditor can ever garnish, levy, attach or receive your VA Disability Benefits. So the problem was that in a Chapter 7 Bankruptcy, the disabled veteran’s disability income would sometimes make them not qualify for a Chapter 7 Bankruptcy but then they wouldn’t be forced into Chapter 13 Bankruptcy which is the kind of Bankruptcy that comes with a Bankruptcy Payment Plan because that would be absurd based on what the VA Benefits Code already says. 

However, in Chapter 13, if a disabled veteran had filed a Chapter 13 to begin with, then there have been a few trial courts who have ruled that by merely filing a Chapter 13 Bankruptcy which automatically comes with a monthly payment plan usually for five (5) years, then that disabled veteran has automatically “decided” to put his VA Disability Benefits into the mix and must use those VA Disability Benefits to pay his creditors through her monthly payment plan. Nothing could be stupider, nothing could have been a more misguided ruling by the court, but they did it. It took Congress to overrule those cases, and the President just signed it. 

However, the HAVEN Act has a specific flaw built into it: Basically, the Chapter 7 Means Test or Chapter 7 Qualification Test and the Chapter 13 Current Income Calculation exclude Social Security from your monthly income or in other words, you don’t have to use your social security to repay your creditors, and VA Benefits and VA Disability Benefits are also excluded by the following language: “any monthly compensation, pension, pay, annuity, or allowance paid under title 10, 37, or 38 in connection with a disability, combat-related injury or disability, or death of a member of the uniformed services,”

Did you see the comma? 

Here’s the mistake, as I see it, in the way the law is written. It’s the sentence that comes next after that comma: “except that any retired pay excluded under this subclause shall include retired pay paid under chapter 61 of title 10 only to the extent that such retired pay exceeds the amount of retired pay to which the debtor would otherwise be entitled if retired under any provision of title 10 other than chapter 61 of that title.”

Just for fun, here is 10 USC chapter 61. So, if your retired pay is under Chapter 61, your retired pay is excluded from Bankruptcy, unless you get more under Chapter 61 than you would have gotten under any other Chapter of the VA Code, but the only part that is included in Bankruptcy is the amount that is over what you would have gotten under such other chapter of the VA Code. 

Typically if you’re medically retired, then you must at least be 30% disabled or more, and then the VA gives you that percentage of your retirement that you would have gotten if you weren’t medically retired. So if you’re 50% disabled and they give you $2000 per month in medical retirement, then that means that if you could have retired at the usual time and age for retirement then the amount you would have gotten would have been $4000 per month. So, it sounds like it would be hard to ever get more than you would have gotten under Chapter 61. So, I’m confused why this is in here.

My final two cents is this, no matter what the Bankruptcy Means Test says and no matter what the Chapter 13 calculation of income says, 38 USC 5301 still states that creditors cannot take your VA Disability Money ever, and that for me is the bottom line.

Even if you fail the Means Test, you still get a Chapter 7 or Chapter 13 Discharge without ever having to pony up a penny of your hard earned and well deserved VA Disability Benefits. Anything else is contrary to the VA Law.

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