SCRA Bankruptcy Protections for Service Members and Veterans

While filing for bankruptcy is never easy, the Servicemembers Civil Relief Act helps ensure that the process is as smooth as possible for military personnel. The SCRA offers some key protections to Service Members, Reservists, National Guard, and Veterans. This guide helps you understand these protections and what you can expect if you decide to file for bankruptcy while serving.

Special rules for military personnel and Veterans in bankruptcy

Stay of bankruptcy proceedings

If you have filed for bankruptcy and then get called to active duty, an automatic stay will stop any court proceedings. Essentially, your bankruptcy will be postponed until you return from active duty. This applies to any military personnel serving on active duty, including National Guard and Reservists.

Means test exemptions

Under normal circumstances, any consumer who files for bankruptcy must submit to a means test. This evaluates your eligibility for filing Chapter 7 bankruptcy based on your income. If your income is above a certain threshold of the federal poverty line in your state, you may not be able to file Chapter 7.

However, the SCRA exempts certain military members from this means test. Thus, you can file for Chapter 7 regardless of your income level if you qualify for the exemption.

• Disabled Veterans are exempt if your debts were primarily incurred while you served on active duty or while performing a homeland defense activity.
  • To qualify for this exclusion, you must have a disability rated 30% or more or received discharge due to a disability suffered in the line of duty.
  • There is no time limit on this exclusion.
• Service Members, Reservists, and National Guard are also exempt when called to active duty or when performing a homeland defense activity for at least 90 days.
  • The exemption remains in effect while on active duty and for 540 days after.
• Unlike the exclusion for Veterans, this exclusion is temporary.
• You may still be required to submit a mean test form no later than 14 days after the 540-day exclusion period ends.

The SCRA extends many of the same protections as filing bankruptcy

Filing for bankruptcy provides an automatic stay that prevents foreclosure, eviction, and civil court judgments for things like collections. Getting this automatic stay is often a reason that consumers decide when to file. It can prevent someone from losing their home or having their wages garnished. For instance, for a homeowner, filing can buy time to make arrangements that would allow them to avoid foreclosure.

For military Service Members, the SCRA grants many of those same protections, as well as additional protections for financial obligations such as debt.

• Foreclosure, eviction, and repossession actions cannot be conducted while someone is serving on active duty. That stay extends nine months after active-duty service.
• A company also cannot obtain a default judgment against someone who is on active-duty service; if you do not have a lawyer who can represent you, any court appearances would also be postponed.
• No wage garnishments can be granted while you are on active-duty service.

In this sense, you do not need to rush to file bankruptcy before your service to avoid these types of financial actions. You will already be protected under the SCRA.

Learn more about the protections granted by the SCRA »

Will filing for bankruptcy affect your security clearance?

Military Service Members have a special consideration they may need to keep in mind when deciding if they should file for bankruptcy. Namely, a bankruptcy filing can potentially have some impact on an individual’s security clearance. However, each situation is reviewed on a case-by-case basis. Filing bankruptcy, itself, would not prevent you from obtaining or maintaining your security clearance.

Financial responsibility is one aspect of your life that may be subject to evaluation for security clearance. The idea is that someone irresponsible with money represents a greater security risk. For example, you may be able to be bribed.

Filing for bankruptcy may indicate that an individual is not financially responsible. However, in some cases, filing bankruptcy may be a sign that a person is taking responsibility. For example, if your spouse died, then the debt that led you to file was beyond your control. In this case, filing is a sign that you are being proactive and attempting to overcome your financial challenges.

Thus, concerns about security clearance should not prevent you from filing. However, you should discuss your clearance and concerns about it with a qualified bankruptcy attorney. That way, you and your attorney can take steps to ensure you won’t lose your clearance.

Tip: Find an attorney with experience helping Service Members

Between the 540-day mean test exclusion period and questions about how filing can affect security clearance, it’s important to find an attorney with experience.

The right attorney will be able to help you understand the potential security clearance impact, especially given that clearance may be affected differently based on which branch of the military you serve in.

A qualified attorney will also be able to help you decide on the best time to file. You may be able to use the exclusion to your advantage to receive a Chapter 7 discharge. If so, you could complete the filing in 90-120 days instead of 3-5 years.