Last year, a new law was enacted called The HAVEN Act which should help disabled veteran show they are entitled to discharge old debts by helping the to qualify for Chapter 7 bankruptcies. Chapter 7 is the form of bankruptcy in which a person is declared assetless and nearly all of his debts are discharged. The debtor the can make a “fresh start” and unsecured creditors are spared the frustration and expense of pursuing and collecting un-collectable judgments.
In order to prevent individuals from taking advantage of the law to discharge debts that they could actually find a way to repay, the Bankruptcy Court has the power to dismiss a chapter 7 case for ‘‘substantial abuse.’’ Since 2005, the Bankruptcy law has included a means or needs-based testing mechanism to determine a debtor’s ability to repay debts and therefore whether his filing of the bankruptcy case should be presumed to be abusive. Section 707(b) of the Bankruptcy Code provides that 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 subject to dismissal or conversion to a chapter 13 case based on the debtor’s income and various specified expenses. The debtor’s income, for purposes of this test, is typically determined by calculating the amount of average monthly income the debtor received during the six-month period preceding the filing of the bankruptcy case.
However, it has also long been the policy that some types of government benefits should not be fairly included in the income test. For purposes of the Bankruptcy Code’s means test, Social Security benefit payments are excluded as income. As Senator Edward Kennedy (D–MA) explained when the “means test” was first proposed:
“The bottom line is that bankruptcy shouldn’t be made more difficult for those who are depending on Social Security for their livelihood. Social Security was developed to ensure that seniors can live their golden years in dignity. If we allow Social Security income to be considered while determining whether someone is eligible for bankruptcy, a portion of those benefits could be used in a manner inconsistent with Congress’ intent.”
Payments to victims of international terrorism and payments to victims of war crimes and crimes against humanity were also excluded from the income side of Chapter 7 means testing.
However, the protected status is given inconsistently under the law. Various other federal retirement benefit programs—such as programs for veterans—that take the place of Social Security, at least for the period during which the worker held the type of employment covered under such program. Much like Social Security, these other federal benefit programs almost always prevent assignment or seizure of these benefits by creditors. Nevertheless, the Bankruptcy Code’s means test treats such payments as income.
Up until last year’s passage of the HAVEN Act, Certain veterans’ disability benefits paid by the U.S. Department of Veterans Affairs and the U.S. Department of Defense had been among those benefits treated as income in the Chapter 7 means testing. Such treatment was seen as “an imbalance in the Bankruptcy Code” that resulted in veteran’s failing the “means” test and being disproportionately steered into Chapter 13 cases because they often fail the Chapter 7 means test.’’
The HAVEN Act remedied this imbalance by adding veteran’s disability benefits to the list of sources which cannot be considered part of the debtor’s income in analyzing his eligibility for Chapter 7 discharge. The veteran’s base retirement pay is still included.
“excludes— (I) benefits received under the Social Security Act (42 U.S.C. 301 et seq.); (II) payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes; (III) payments to victims of international terrorism or domestic terrorism, as those terms are defined in section 2331 of title 18, on account of their status as victims of such terrorism; and (IV) any monthly compensation, pension, pay, annuity, or allowance paid under title 10, 37, or 38 in connection with a disability, combat-related injury or disability, or death of a member of the uniformed services, except that any retired pay excluded under this subclause shall include retired pay paid under chapter 61 of title 10 only to the extent that such retired pay exceeds the amount of retired pay to which the debtor would otherwise be entitled if retired under any provision of title 10 other than chapter 61 of that title.”