The bankruptcy code is intended to give a fresh financial start to debtors and a point of contact for creditors. However, the code is unfavorable to disabled veterans because it makes them seek discharge under the more burdensome provisions of Chapter 13.
Over 13 years ago, Congress changed the federal bankruptcy code to force debtors with incomes meeting or exceeding the median income in their locality to file under the reorganization provisions of Chapter 13 instead of Chapter 7 liquidation. Chapter 7 is a faster process, while Chapter 13 reorganization takes three to five years. This change was intended to stop debtors who could pay some of their debt under Chapter 13 from abusing the system by seeking faster discharge under Chapter 7.
However, these changes had unintended and negative consequences for disabled veterans seeking debt relief. Their disability benefits are now included in calculations of their monthly income and would have them exceed the Chapter 7 eligibility limits for a clean slate discharge.
However, the code still excludes payments to victims of war crimes or international terrorism. This change prevents disabled veterans from being treated equally as other Americans with disabilities.
For example, a veteran who receives 100 percent military disability income and who is married to a school teacher would be ineligible Chapter 7 even though it would otherwise be an ideal way to deal with debt. The veteran's disability income being combined with the spouse's teacher income removes the Chapter 7 eligibility. However, creditors cannot attach the veteran's military disability payments.
A bill was introduced in the Senate, the Honoring American Veterans in Extreme Need Act, which would exclude military disability payments as being included in current monthly income under bankruptcy. It would also exempt other disability benefits for veterans from this calculation.