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Disabled vets can get ‘fast track’ to Chapter 7

Q. I am an 80-percent disabled veteran who had to declare bankruptcy last year. I researched the process and found that a disabled veteran whose debt was incurred primarily while on active duty is supposed to be more or less excused from the means test. I have found several online texts that state, and I paraphrase, that being a disabled veteran is a “fast track” to a Chapter 7. Is that true?

A. While bankruptcy falls outside the areas of law I practice, I reached out to Matthew E. Faler, a lawyer in Fountain Valley, Calif., for assistance. He tells me you are correct: Being a disabled veteran who incurred debt while on active duty does give you a fast track to a Chapter 7 bankruptcy. But this fast track is neither guaranteed nor absolute — you need to jump a lot of hurdles.

This was part of the National Guard and Reservists Debt Relief Act of 2008, signed by President George W. Bush. Despite the name, the law also applies to active-duty members.

The “military exclusion” from the means test has two parts: The debtor must be rated by the Department of Veterans Affairs as 30 percent or more disabled, and the debt must have occurred while on active duty.

If our prospective debtor purchased his primary residence prior to active duty or incurred debt prior to active duty, he might not qualify under this exception. However, this is a new section of law and an attorney could link the Chapter 7 filing to his military service. Second, I doubt the U.S. Trustee’s Office would seriously fight this debtor’s discharge — unless his income as determined by the means test is extremely high.

A resource for service members and veterans considering tough decisions about bankruptcy is the National Association of Consumer Bankruptcy Attorneys, www.nacba.org.

Q. I must file for bankruptcy. Will this affect my top-secret security clearance?

A. One of the broad adjudicative guidelines for granting a security clearance is “financial considerations.” Financial conditions that could prevent a clearance include a history of failing to meet financial obligations, deceptive or illegal financial practices (such as tax evasion), inability to satisfy debts, unexplained affluence and financial problems related to gambling, drugs or alcohol.

While proceeding with bankruptcy doesn’t automatically disqualify you from holding a security clearance, odds are you are going to lose your top-secret clearance. There are mitigating factors that could help prevent the loss of your clearance: if the inability to pay your debt was an isolated incident; if the conditions that resulted in your need to file bankruptcy were largely beyond your control (such as death, divorce or a business downturn); if you are receiving counseling for what caused the bankruptcy and the problem is being resolved; or if you initiated a good-faith effort to repay the debts.

When you consult with a bankruptcy attorney, make sure to mention that you hold a security clearance so you can try to mitigate the consequences that a bankruptcy may have.

Mathew B. Tully is an officer in the New York National Guard and a veteran of Operation Iraqi Freedom. He is also the founding partner of Tully Rinckey PLLC (www.fedattorney.com). Contact him at askthelawyer@militarytimes.com. This column is for informational purposes only and is not intended to constitute legal advice.