The Chapter 7 and Chapter 13 bankruptcy process in Michigan is very slightly easier for veterans. However, even for Michigan veterans, the bankruptcy process remains maze-like, however worthwhile it may be.
This Article aims to explain a few of the ways in which bankruptcy in Michigan is easier for veterans.
Or, at least, how bankruptcy in Michigan is different for veterans.
Veterans and the Means Test
The so-called Means Test is the mathematical formula and form that you must complete and file with your Chapter 7 or Chapter 13 bankruptcy petition.
It serves different purposes depending upon which bankruptcy Chapter you are filing.
In either case, the Means Test contains some special provisions that make bankruptcy easier for veterans.
The Chapter 7 Means Test
In Chapter 7 bankruptcies, the Means Test determines whether you are eligible to file Chapter 7 bankruptcy at all.
How does it do that?
How the Means Test Works
We have written extensively about the Chapter 7 Means Test in a prior Article located here.
However, in short, the Means Test requires that you average your monthly gross, household income for each of the 6 months prior to the month in which you file your Chapter 7.
“Gross” means “pre-deduction” income. With no taxes, retirement withholdings, union dues, or any other paycheck deduction or business expense applied.
“Household” means that you must include and average in all income earned by all wage-earners in your household. What’s a household? It’s definitely a spouse or a cohabiting Significant Other. It is not necessarily other people, such as roommates or renters, who may live under the same roof.
An experienced Metro Detroit bankruptcy attorney is best suited to help you determine who is and who is not a “household member” for Means Test purposes in your household.
In any case, the Means Test multiplies that 6-month average number by 12 (months) to arrive at what it thinks your annual household income is. Then, it compares that number to the median income in Michigan for a household of your size.
If your Means Test income average is below the median amount, you’ve “passed” the Means Test and are eligible to file Chapter 7 bankruptcy.
If your average is above the median, then your Michigan bankruptcy attorney will complete “Part 2” of the Means Test. This requires applying a number of deductions allowable under the US Bankruptcy Code from your gross income.
Not every “real life” expense or paycheck deduction is allowed under the Bankruptcy Code and under current case-law.
However, if enough of that gross income can be clawed away deductions, you may still be eligible for Chapter 7. Otherwise, you will be required to file a Chapter 13 bankruptcy instead.
How The Chapter 7 Means Test is Easier for Veterans
For Veterans, the Means Test offers a couple of additional, favorable rules.
In some, very specific cases, veterans are exempt from the requirement to complete the Chapter 7 Means Test.
1. Disabled Veterans
Disabled veterans who incurred the majority of their debt while on active duty are exempt from the Means Test requirement.
This “safe harbor” sounds good on paper, but the scenario arises fairly infrequently.
Furthermore, the Means Test is not the final word on Chapter 7 eligibility. Other provisions of the Bankruptcy Code impose a “good faith” eligibility standard in addition to the Means Test.
This “good faith” requirement means that any debtor whose net monthly take-home pay greatly exceeds his or her necessary household expenses may face issues after filing. The US Trustee’s Office maintains the integrity of the US bankruptcy process for the US Department of Justice. If the US Trustee thinks a Chapter 7 filing lacks good faith (because the veteran-debtor can clearly afford to pay some debt), he or she will file a Motion to Dismiss.
Veterans relying on this safe harbor Means Test provision need to work with an experienced Michigan bankruptcy attorney for this reason. Among others.
2. Active Duty Military Service
Service members on active duty or in the midst of “homeland defense activities” is also exempt from the Means Test. However, this exemption expires 540 days after the completion of that service.
Thus, if you are active duty military seeking debt relief, the timing of your Chapter 7 filing is crucial.
3. The Haven Act
The Haven Act was passed by Congress in 2019 to further make bankruptcy easier for veterans.
In short, the Haven Act excludes veteran’s benefit funds from the “income” that must be averaged into the Means Test.
Some of the veteran’s benefits that need not be factored into the Means Test include:
- Permanent disability retired pay;
- Temporary disability retired pay;
- Retired of disability severance pay for pre-existing conditions;
- Disability severance pay;
- Combat-related special compensation;
- Survivor Benefit Plan for Chapter 61 Retirees;
- Special Survivor Indemnity Allowance;
- Special Compensation for Assistance with Activities of Daily Living;
- VA Veterans Disability Compensation;
- VA Dependency and Indemnity Compensation;
- VA Veterans Pension.
This applies to both the Chapter 7 and the Chapter 13 Means Tests to make bankruptcy easier for veterans.
Chapter 13 Bankruptcy and Veterans
Chapter 13 bankruptcy is a “reorganization” process rather than a liquidation process as is Chapter 7.
What this means in plain English is that, in Chapter 13, veterans and others must repay some of the debt that they owe. However, the amount that they pay and the order in which creditors are repaid is “reorganized” in a Bankruptcy Court-enforced 3-5-year payment plan.
Each month in Chapter 13, you make a payment to the Chapter 13 Trustee assigned to your case by the Bankruptcy Court. The Trustee uses these funds to repay your creditors in the order and amount mandated by your Chapter 13 payment plan and by law.
Secured creditors are typically paid in priority over unsecured creditors. Unsecured debt includes credit card balances, back rent, personal loan balances, and so on.
Unsecured creditors typically only receive whatever is left over from the debtor’s monthly payments after higher priority creditors are parties receive. The balance left owed to them “on paper” is totally discharged at the end of the Plan as in Chapter 7.
If only 19 cents remains after higher priority creditors are paid, that’s all your unsecured creditors receive.
However, the Means Test in Chapter 13 can alter this.
The Means Test in Chapter 13
In Chapter 13, the Means Test works just as it does in Chapter 7 bankruptcy. However, it is not an eligibility test in this context.
Instead, the Chapter 13 Means Test governs the overall payout to creditors. If you are “above median” on the Chapter 13 Means Test, you must file a 5-year Chapter 13 payment plan rather than a 3-year plan.
Depending on the deductions applied by your bankruptcy attorney, you may also be required to repay some minimum amount of money to your unsecured creditors.
The Chapter 13 Means Test will calculate a number called “Disposable Monthly Income,” or “DMI.”
The Bankruptcy Code requires that, in Chapter 13, your unsecured creditors must receive a minimum of DMI multiplied by the number of months in your payment plan.
Thus, if you have $100.00 of Means Test DMI and will file a 60 month plan, your unsecured creditors must receive $6,000 (as a class, not individually) from your Chapter 13 plan. After all of your other creditors are paid.
How Is Chapter 13 Bankruptcy Easier for Veterans?
The Haven Act also allows those above-listed forms of veteran’s benefits from the Means Test’s averaged income in Chapter 13.
This means that the odds of “passing” the Means Test and filing only a 3-year Chapter 13 are greater. And it means that the odds of DMI being closer to zero or even a negative amount are greater.
Zero or negative DMI means that unsecured creditors need be paid no particular amount of money in a Chapter 13.
How Is Bankruptcy Not Easier for Veterans?
All of that said, there are a number of ways in which the bankruptcy process is not easier for veterans.
Every sort of bankruptcy proceeding will require at least one, if not 2 or more, hearings. Debtors are required to attend these hearings in person.
During the Covid pandemic period, most of the bankruptcy hearings conducted in the Eastern District of Michigan have been telephonic or via Zoom or other video interface. But this is changing, and veterans filing for bankruptcy in Detroit, Ann Arbor, Flint, Bay City, Southfield, Monroe, Livonia, or elsewhere, should expect to be required to attend a hearing in person.
For military service members stationed overseas on active duty, it may be possible to have a hearing conducted telephonically or via Zoom, still. However, there is no provision in the Bankruptcy Code or Local Court Rule requiring that this be allowed.
Your Metro Detroit bankruptcy attorney will need to file a motion and obtain a court order and/or the consent of the Chapter 7 or Chapter 13 Trustee on your case.
The outcome of any adversarial motion is never guaranteed, although Trustees are generally sympathetic to such considerations.
A military security clearance can also be affected by a bankruptcy filing. Some veterans maintain a security clearance even after active duty service is completed.
Depending upon the reasons for your debt (gambling versus, say, home foreclosure), there may be nothing to worry about here, so long as you do not lie about having filed bankruptcy or otherwise fail to disclose it as required.
However, this will be something you want to discuss with your Detroit bankruptcy lawyer when deciding whether or not to file bankruptcy.
Bankruptcy for Veterans: Contact a Livonia, Michigan Bankruptcy Attorney Today
The bottom line is that Michigan bankruptcy may be easier for veterans. Then again, if you are active duty military or have a security clearance to worry about, it may be more complex for you than for others.
It pays to work with an experienced Metro Detroit bankruptcy attorney if your Chapter 7 or Chapter 13 involves some of these issues.
Offering free, virtual consultations and friendly, one-on-one service from Livonia bankruptcy attorney John Hilla, we will ensure that your matter is handled properly, competently—and with kindness.