Bankruptcy and the Military Special Issues Reguarding Active Duty Servicemen and Veterans

The following was taken from a presentation Erin gave at Baylor Law School for Veterans on 11/11/10:

As the economic climate continues to deteriorate in the U.S., financial difficulties seem to be affecting more and more individuals. Foreclosures and bankruptcies are now at record highs throughout the nation. As an attorney with an office in Killeen, Texas just miles from the entrance of Ft. Hood, my staff and I daily counsel soldiers, veterans and military contractors who are experiencing financial difficulties concerning their bankruptcy and non-bankruptcy options. My staff and I are honored to assist those who are serving our country address their financial problems.

Let me start by telling your about myself and my practice. I have been practicing exclusively bankruptcy law in Texas for 28 years. I have an office in Waco, Texas which is located just blocks away from the Bankruptcy Court for the Western District of Texas. I also have an office in Killeen, Texas just miles from the entrance to Ft. Hood. Bankruptcies filed for individuals living in Killeen, Belton, Temple, Copperas Cove, Harker Heights (virtually all of the communities surrounding Ft. Hood) are all filed in the federal bankruptcy court in Waco, Texas. Therefore, having an office in both locations is very advantageous. In fact, the Waco Bankruptcy Court receives bankruptcy filings from Hill, Bell, McLennan, Coryell, Limestone, Freestone, Hamilton, Robertson and Milam Counties. My staff includes myself and two associate attorneys, two paralegals and three legal assistants. I am a frequent lecturer on bankruptcy topics training other lawyers on bankruptcy topics. I am the co-chair for the State of Texas for the National Association of Consumer Bankruptcy Attorneys. I taught a course called “Creditors Rights and Debtors Remedies” as an adjunct professor at Baylor Law School for 11 years. My firm represents primarily Debtors and files bankruptcy cases for both individuals and small businesses. We have two web sites specifically describing our bankruptcy practice – www.centraltexasbankruptcy.com and www.texasmilitarybankruptcy.com.

There are basically four types of bankruptcies. Chapter 7 is the most common type of bankruptcy and is used to discharge unsecured debt, i.e. credit cards, medical bills, judgements and payday loans. Chapter 13 is used to stop a foreclosure on a home or a car and allow the debtor to re-amortize a car loan and pay past due home mortgage payments over three to five years. Chapter 13 can also be used to pay the IRS over three to five years with little to no interest and without penalties. Chapter 12 is a reorganization proceeding for family farmers. Chapter ll is a reorganization for businesses and individuals with more complicated financial problems.

When an individual or business files a bankruptcy case, the filing of the bankruptcy case operates as an injunction stopping basically all creditor activity. This is commonly known as the “automatic stay”. This stay is automatic upon the filing of the case. The stay enjoins foreclosures, repossessions, lawsuits, creditor calls and virtually all types of collection activity. The stay is the most powerful aspect of a bankruptcy filing. It even stays the IRS in its collection efforts. It allows the debtor relief to either request discharge of debts in a Chapter 7 case or propose a repayment plan in a Chapter 11, 12 or 13 bankruptcy case.

Most individual debtors file relief under Chapter 7 of the Bankruptcy Code. The case is commenced by the filing of a petition and a matrix or mailing list of all the debtor’s creditors. That mailing list is used by the Bankruptcy Court’s clerk’s office to mail a notice to all creditors of the filing of the bankruptcy case and the commencement of the automatic stay. The debtor must also list all of his/her assets, all of his/her liabilities in bankruptcy Schedules, answer questions contained in a Statement of Financial Affairs and prepare a budget which reflects why the unsecured creditors can not be paid. All of these documents are signed under the penalty of perjury. The debtor then attends a meeting and responds to basic questions posed by the Chapter 7 Trustee. Sixty days after the meeting with the Trustee, the debtor receives a discharge. The discharge is a permanent injunction enjoining collection as a personal liability against the debtor of all debts that were discharged in the Chapter 7 case.

The debtor must list all of his/her assets on the bankruptcy schedules. The assets are then claimed as exempt. Individuals filing bankruptcy in Texas can claim their assets as exempt using either the Texas state exemptions contained in the Texas Property Code or the exemptions provided in the U.S. Bankruptcy Code. Both of these statutes allow most individuals filing Chapter 7 to retain virtually all of their assets because those assets are exempt. In general, individual debtors filing bankruptcy can retain their home, cars, contents of their home, retirement accounts, tools of their trade and pets. The federal Bankruptcy Code exemptions allow debtors without a lot of equity in their home to exempt extra property by using the federal “wildcard” exemption. In essence, an experienced bankruptcy attorney can usually see that all a debtor’s property can be claimed as exempt and therefore retained. The purchase money loan (i.e. mortgage on the home and purchase money lien on the car) must be paid if that collateral is to be retained by the debtors. However, cars and homes can also be surrendered and the unsecured deficiency which normally results after foreclosures is discharged. Debt can be discharged in a chapter 7 case even if it has been reduced to a judgment. A Chapter 7 case can be filed once every eight years.

A Chapter 13 case is also commenced by filing a petition which operates as an automatic stay against virtually all creditor collection activity. Chapter 13 debtors also file the same Schedules and Statement of Financial Affairs as Chapter 7 debtors. They also file a Chapter 13 Plan which proposes how the debt is to be restructured and repaid. Foreclosures on homes are automatically stopped and the debtor is allowed three to five years to repay the missed house payments which were precipitating the foreclosure. Debt secured by cars can be re-amortized and interest rates can be reduced. Debt owed to the IRS can be repaid with little or no interest over three to five years. Unsecured debt can be paid pennies on the dollar and without interest. Non-exempt property can be retained by the debtor as long as the debtor pays the liquidation value of that non-exempt property to the creditors over the three to five year life of the Chapter 13 plan.

A Chapter 13 Trustee is appointed in all Chapter 13 cases. That Trustee presides over a meeting with the debtor and his attorney and serves as a disbursing agent disbursing the debtor’s monthly payments to the creditors. The debtor’s Chapter 13 plan is presented to the Bankruptcy Judge for confirmation. If confirmed by the Court, the debtor makes the plan payments over the proposed three to five year time period proposed by the plan. If the debtor makes all of the plan payments, the debtor receives a discharge.

A Chapter 13 case is unique in that the commencement of the case operates to stay all collection activity against the debtor and operates as a co-debtor stay enjoining collection activities against other individuals who have co-signed debt with the debtor. This can be very helpful to individuals whose parents have co-signed loans.

Chapter 7 and Chapter 13 cases do not discharge student loans, child support or alimony. Debt owed to the IRS can be discharged. Specifically, income taxes (debt owed on a 1040 income tax return) can be discharged in a Chapter 7 case if the return was due more than three years prior to the filing of the bankruptcy petition, the tax return was filed more than two years prior to the filing of the bankruptcy petition and the debt was assessed by the IRS more than 240 days prior to the filing of the bankruptcy case. Non-dischargeable taxes can be paid without penalty and with little or no interest over the three to five year term of the Chapter 13 plan.

Debt owed to AAFES and Military Star is dischargeable in a Chapter 7 or Chapter 13 bankruptcy case. Involuntary allotments initiated by AAFES or Military Star or any other creditor are also stayed by the filing of a Chapter 7 or Chapter 13 bankruptcy case and must be stopped.

Since my law firm represents soldiers, civilian contractors and other military personnel, especially in our Killeen office, we are frequently asked if filing for bankruptcy will affect a security clearance. I found this discussion on the United States Air Force Academy website.

“The status of your security clearance can be affected, but it is not automatic. The outcome depends on the circumstances that led up to the bankruptcy and a number of other factors, such as your job performance and relationship with your chain of command. The security section will weigh whether the bankruptcy was caused primarily by an unexpected event, such as medical bills following a serious accident, or by financial irresponsibility. The security section may also consider the recommendations and comments of your chain of command and co-workers. This is an issue that can be argued both ways, so as a practical matter your security clearance probably should not be a significant factor in making your decision about whether to file bankruptcy. The amount of your unpaid debts, by itself, may jeopardize your clearance, even if you don’t file bankruptcy. In that sense, not filing for bankruptcy may make you more of a security risk due to the size of your outstanding debts. By the same token, using a government approved means of dealing with your debts may actually be viewed as an indication of financial responsibility. Eliminating your debts through bankruptcy may make you less of a security risk. There is no hard and fast answer there, with one exception: It never hurts to have a good reputation with your co-workers and your chain of command.”

I would also add that section 525 of the Bankruptcy Code states that:

“…(A) governmental unit may not deny revoke, suspend or refuse to renew a license, permit, charter, franchise or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under the Bankruptcy Code solely because the debtor has been a debtor under the Bankruptcy Code.”

Reviewing both of these sections, I conclude that using a law that was established by the authority of the U.S. Constitution to deal with one’s financial problems is a responsible and legal way of handling one’s debt. Not dealing with financial problems is irresponsible.

We recently represented a Ft. Hood soldier who had such severe debt problems that his military clearance privileges had been revoked. We filed a Chapter 7 bankruptcy case for him and his wife. We made sure that all of the negative comments posted on their credit reports with Experian, Trans Union and Equifax credit bureaus were listed on their bankruptcy schedules. All of their debts were discharged under federal law. After they received their bankruptcy discharge, we wrote his commanding officer and explained the situation that led to his debt problems and explained that his debts were now legally and fully discharged under federal law. His security clearance was reinstated. He was so very happy! We can not guarantee this result in every case because it is ultimately up to the commanding officer. However, this result was definitely the correct result for this deserving soldier and his family.

In 2005, Congress enacted substantial amendments to the Bankruptcy Code. These amendments were initially designed to attempt to make more individuals file Chapter 13 bankruptcy instead of Chapter 7 bankruptcy. The most predominate change that these amendments made to the bankruptcy laws is that bankruptcy law and the documents that must be filed in a bankruptcy case are now very complicated. Since all of the forms are signed by the debtor under the penalty of perjury, it is extremely important that these forms are prepared by an attorney who is very familiar with bankruptcy law.

The 2005 amendments also made Chapter 7 more accessible to members of the military and veterans. Specifically, Chapter 7 is fully available and a Court can not convert a case to a Chapter 13 bankruptcy case if the debtor is a disabled veteran and his/her debts were primarily incurred while the debtor was on active duty or performing a homeland defense activity. The bankruptcy court can find that a call to active duty in the U.S. armed services is a “special circumstance’ thereby allowing a debtor to receive relief under Chapter 7.  Special relief under Chapter 7 is also available to individuals who have served as members of a reserve component of the Armed Forces or a member of the National Guard.

Under the 2005 amendments to the Bankruptcy Code, a debtor’s income during the six months preceding the filing of a bankruptcy case must be examined and compared to income of other individuals of the same household size according to the U.S. Census. If a debtor’s household income is less than the median income according to the U.S. Census, Chapter 7 relief is virtually automatic. If a debtor’s household income is more than the median income according to the U.S. Census, chapter 7 relief is still available but the forms that must be completed are more complicated.

Most bankruptcy attorneys offer a free initial consultation in order to evaluate whether or not a bankruptcy case is an appropriate option for a client. If Chapter 7 relief is appropriate, most law firms charge between $2,000.00 and $3,000.00 in attorney fees and expenses and most firms allow these fees to be paid under a payment plan. The Waco Bankruptcy Court has established a flat fee of $3,000.00 for a consumer Chapter 13 case. Most lawyers will file a case for a small down payment with the balance paid under the Chapter 13 plan. The filing fee for a Chapter 7 case is $299.00 and the filing fee for a Chapter 13 case is $274.00. Before either a Chapter 7 or Chapter 13 case can be filed, the debtor must attend a credit counseling session which is a simple internet session. During the bankruptcy case, the debtor must also take a debt management course which is offered either live, via DVD or over the internet.

In essence, bankruptcy is a legal, constitutional, moral way in which to deal with financial difficulties. Many honorable Americans, including Walt Disney and President Abraham Lincoln, have unexpectedly found themselves in financial difficulties and chose filing a bankruptcy case as a way in which to deal with that problem. Filing a bankruptcy case is a serious matter. A bankruptcy case is a case commenced in U.S. Federal Court and all papers filed in the case by the debtor are signed under the penalty of perjury. However, with the help of an experienced bankruptcy attorney, an honest debtor can find needed relief from otherwise insurmountable financial problems.

For more information, please check out our website dedicated to soldiers, civilian contractors and veterans, Texas Military Bankruptcy.

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