VA Benefits and Bankruptcy

January 5, 2015

With malice toward none, with charity for all, with firmness in the right as

God gives us to see the right, let us strive on to finish the work we are in,

to bind up the nation’s wounds, to care for him who shall have borne the

battle and for his widow, and his orphan, to do all which may achieve and

cherish a just and lasting peace among ourselves and with all nations.

 Abraham Lincoln, Second Inaugural Address, March 4, 1865

 

Abraham Lincoln is considered the father of the Veteran’s Administration, which arose out of the national desire to care for civil war veterans. From 2000 to 2013, the number of veterans who were receiving disability payments rose by almost 55 percent, from 2.3 million to 3.5 million. Some of these veterans are permanently and totally disabled, and unable to work. Some struggle with debts that they cannot pay with their monthly VA check.

It is important to have an experienced attorney working on your side if you file bankruptcy when in receipt of VA disability compensation benefits. Many debtors (and some attorneys!) believe that VA disability benefits are entirely excluded from the bankruptcy process. This is not true. Whether VA disability benefits are protected during bankruptcy can depend on the circumstances of the case.

Means Testing

VA disability compensation is included in the debtor’s Chapter 7 Means Test calculation. However, many veterans in receipt of VA disability can avoid the Means Test altogether if the individual is (1) a veteran who is entitled to compensation under laws administered by the Secretary for a disability rated at 30 percent or more, or (2) a veteran whose discharge or release from active duty was for a disability incurred or aggravated in line of duty. Additionally, the debts in the veteran’s bankruptcy case must have been “primarily” incurred while on active duty, or while performing a homeland defense activity. “Primarily” is generally interpreted by the bankruptcy courts as greater than 50%.

The Bankruptcy Estate

Even though VA disability compensation is used to determine the veteran’s eligibility to file Chapter 7 bankruptcy, these benefits are not part of the debtor’s bankruptcy estate. In other words, the VA disability compensation is protected from creditor garnishment and is also protected from the trustee during bankruptcy (although there are exceptions including federal offsets and child support debts). Generally, the debtor cannot be forced to use this money to pay creditors during bankruptcy. 

If you are receiving VA benefits and need bankruptcy relief, consult with an experienced attorney who can protect your money and discharge your debts. Your attorney can review your situation and advise you on the right way to avoid trouble during your bankruptcy case.

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