NEW BANKRUPTCY PROTECTION FOR
RESERVE AND NATIONAL GUARD MEMBERS
Courtesy of LCDR James T. Mills, JAGC, USN
23 Oct 08
From: Deputy Assistant Judge Advocate General, Legal Assistance (Code 16)
Subj: LAPA 14-08: NEW BANKRUPTCY PROTECTION FOR RESERVE AND NATIONAL GUARD
MEMBERS
1. On 20 October 2008 President Bush signed into law the “National Guard and
Reservists Debt Relief Act of 2008,” P.L. 110-438, which provides some relief
and protection under the bankruptcy law for members of the Reserve components
and National Guard who have been on active duty since September 11, 2001.
2. This new law provides relief for qualifying Reserve and Guard families who are seeking protection under Chapter 7 of the bankruptcy laws. Chapter 7 is a form of bankruptcy relief by which an individual debtor may discharge his or her personal liability for certain debts in exchange for relinquishing the debtor's nonexempt assets to a bankruptcy trustee for liquidation and distribution to creditors. In short, Chapter 7 is discharge of debt via liquidation of all but certain exempt assets. In contrast, Chapter 13 of the bankruptcy laws is a “conditional discharge” program, where the debtor is provided bankruptcy relief by committing to repay some portion of his or her financial obligations in exchange for retaining nonexempt assets and receiving a broader discharge of debt than is available under Chapter 7. Chapter 13 is a repayment plan program that is customized for each debtor. This is a very simple overview of the two Chapters. A comprehensive but easy to understand guide to bankruptcy law is available at http://www.uscourts.gov/bankruptcycourts/bankruptcybasics.html. A downloadable manual that explains current bankruptcy law is available at http://www.uscourts.gov/bankruptcycourts/bankbasics0908.pdf.
3. The new law modifies portions of the 2005 Bankruptcy Act. In particular, 11 U.S.C. section 707(b) required that the court examine a Chapter 7 bankruptcy petition using a “means test” for all applicants. This test is an income/expense screening mechanism for the purpose of determining a consumer debtor's ability to repay debts. If a Chapter 7 debtor has the ability to repay debts and has no special circumstances, the filing of the debtor's case is presumed to be an abuse and therefore subject to dismissal or conversion into a Chapter 13 repayment plan case.
4. P.L. 110-438 waives the means test for entering into
Chapter 7 bankruptcy protection for members of the Reserves or National Guard
who are called to active duty (or for the Guard only, called to perform a
“homeland defense activity” as defined in 32 U.S.C. section 901) for a period of
more than 90 days since September 11, 2001. Congress recognized that many
Reserve and Guard members take pay cuts when they commence active duty and
consequently suffer from financial hardship which could result in a bankruptcy
action. Further, some Reserve and Guard members were being disadvantaged by the
bankruptcy laws upon demobilization since the “means test” for Chapter 7 looked
back six months which, in the case of many servicemembers, included periods of
receipt of combat pay and low expenses, which skewed their income and expense
filings with the court and did not reflect their current circumstances.
5. The Act’s protection extends during the period of active duty and for 540
days (18 months) after release from active duty. Note well that the protections
from the means test are only for prospective cases “commenced” under the
bankruptcy laws in the three year period beginning on the effective date of the
Act. Existing cases are not covered, nor is there any impact on Chapter 13
cases. As can be surmised from the Act’s name, there is no benefit under this
new law for members of the active components.
6.
Code 16’s point of contact on this issue is Mr. George Reilly, available at
George.Reilly@navy.mil or (202) 685-4639.
S. L. HAYCOCK