How could bankruptcy affect a veteran’s disability benefits?

Unfortunately, the soldiers who dedicate their lives to serving our country often face significant financial struggles after they complete their duty. These struggles only become more of a challenge for veterans who have disabilities.

Bankruptcy can help many people, including veterans, find the debt relief they deserve. However, many veterans might wonder how filing Chapter 7 bankruptcy will impact them, their family and the disability benefits they rely on?

Exempt property or disposable income?

Both the New Mexico and federal bankruptcy codes list veteran’s disability benefits as exempt property. So, veterans should be able to protect their benefits during bankruptcy.

However, these benefits can sometimes count as disposable income as well. This can create challenges for veterans regarding:

  1. The means test: If these benefits count as income, veterans might not pass the Chapter 7 means test. Then, they might not qualify for bankruptcy. There are specific factors that exempt some veterans from taking the means test. But veterans who do not meet these qualifications could face some challenges.
  2. Creditors: In addition, creditors could often recover these payments to pay off debts. Disability benefits make a huge difference for veterans. They help them provide for their families. But veterans could lose this critical support to creditors if they fall on financial hard times.

These contradictions often make it difficult for veterans to obtain debt relief. Many laws tried to protect these benefits during bankruptcy before, but there seemed to be too many loopholes that left them vulnerable.

New law aims to protect disability benefits in bankruptcy

Federal lawmakers passed the Honoring American Veterans in Extreme Need (HAVEN) Act just last month. This act specifically protects veteran’s disability benefits by:

  • Preventing creditors from taking the benefits
  • Excluding the benefits from disposable income

This law classifies veterans’ disability benefits in the same category as Social Security Disability (SSDI) benefits. Therefore, these benefits will almost always be exempt property that veterans can protect throughout the process of their bankruptcy.

Many veterans depend on these benefits. And it seems that the HAVEN Act will safeguard both these benefits and the veterans who earned them.