Mr. Sparks is a student associate at West & Dunn, and a law student at the University of Wisconsin Law School.
Among the most hard-hit by the coronavirus (COVID-19) pandemic are veterans. Too often, veterans face homelessness, lack of adequate health care, delays in receiving financial support, poverty, and, in extreme cases, death.
RISKS FACED BY VETERANS
Wisconsin is home to over 371,000 veterans. The vast majority are over 60 years old. The largest group served during the Vietnam era, where 2.8 million veterans nationwide were exposed to agent orange. Younger, and now middle-aged, veterans deployed to Iraq and Afghanistan were exposed to dust storms, oil fires and burn pits, leading to high rates of asthma and other respiratory illnesses. With age and respiratory illnesses both being high-risk factors for COVID-19 mortality, veterans are a significant high-risk population, not only concerning health risks but also, the financial damage that too often accompanies health problems.
Federal law entitles veterans to some types of monetary benefits, such as compensation for disabled veterans injured in the line of duty. Even so, according to the U.S. Census Bureau, many veterans with service-connected disabilities fall below the poverty line.
RELIEF AVAILABLE TO VETERANS IN FINANCIAL DISTRESS
A veteran facing severe financial hardship or poverty may obtain relief from certain debts by filing for bankruptcy. However, bankruptcy relief comes with a significant cost. Debtors must sacrifice some of their income or assets to satisfy their creditors’ claims in whole or in part. Until 2019, the federal Bankruptcy Code often required veterans to relinquish a portion of their veterans’ benefits to their creditors in order to obtain bankruptcy relief. The Bankruptcy Code treated veterans’ benefits less favorably than Social Security benefits, which federal law typically insulates from claims of creditors.
In 2019, Wisconsin Senator Tammy Baldwin introduced and Congress later enacted the Honoring American Veterans in Extreme Need Act of 2019 (the HAVEN Act), stating that
[F]orcing our veterans and their families to dip into their disability-related benefits to pay off bankruptcy creditors dishonors their service and sacrifice. These benefits are earned and the HAVEN Act will protect the economic security of our veterans, especially during challenging times.
BALANCING THE CONFLICTING GOALS OF PROVIDING A FRESH START WITH PROTECTING CREDITORS’ RIGHTS
The federal Bankruptcy Code attempts to balance two conflicting goals. The first goal is to give financially distressed debtors a fresh start. As explained by the United States Supreme Court, bankruptcy law creates a procedure by which debtors can reorder their affairs, make peace with their creditors, and enjoy a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt. To assist in this fresh start, the Bankruptcy Code allows debtors to discharge (eliminate their obligation to repay) some or all of their debts if they satisfy certain statutory prerequisites. At the same time, the Bankruptcy Code promotes a second, countervailing goal: creating a fair, orderly, and efficient mechanism through which creditors may recover as much of their unpaid debts as possible.
HAVEN ACT NOW PROTECTS VETERANS BENEFITS IN CHAPTER 13 BANKRUPTCIES
Prior to the HAVEN Act, the Bankruptcy Code did not include an exclusion for veterans’ benefits when calculating the income of a veteran seeking bankruptcy protection. Previously, courts had overwhelmingly concluded that veterans’ benefits qualified as “disposable income” that debtors needed to pay to creditors before they could obtain relief under Chapter 13 of the Bankruptcy Code. The HAVEN Act created a new exemption from disposable income for certain veterans’ benefits, such as disability benefits and combat-related injury compensation. Therefore, debtors seeking to file this type of bankruptcy action no longer need to surrender these benefits to their creditors when their bankruptcy plan does not pay unsecured creditors in full.
HAVEN ACT MAY INFLUENCE TYPES OF BANKRUPTCY PROTECTION AVAILABLE TO VETS
The HAVEN Act may influence whether debtors can file for bankruptcy under Chapter 13 or Chapter 7. Because Chapter 7 allows debtors to obtain a discharge more quickly than Chapter 13, many debtors prefer to file under Chapter 7, especially if their debts significantly outweigh their assets. However, because creditors typically receive more money under Chapter 13 cases than in Chapter 7 liquidations, Congress enacted a provision known as the “means test” that shifts certain consumer debtors out of Chapter 7 and into Chapter 13. If a Chapter 7 debtor’s “current monthly income,” reduced by certain allowable expenses, exceeds certain statutory thresholds, then (with limited exceptions) the means test requires the court to either dismiss the debtor’s Chapter 7 case or convert the case to a Chapter 13 proceeding.
The Bankruptcy Code defines “current monthly income” as “the average monthly income from all sources that the debtor receives” minus specific exclusions, i.e. Social Security benefits. Until Congress enacted the HAVEN Act, veterans’ benefits were not excluded from current monthly income. Before the HAVEN act, veterans’ benefits could cause debtors’ current monthly income to exceed the means test threshold, forcing them to file for bankruptcy under Chapter 13 when they might have preferred or found better relief under Chapter 7. The HAVEN Act amended the definition and, now, excludes certain veterans’ benefits, such as disability benefits and combat-related injury compensation. As a result, these types of benefits will not, on their own, disqualify debtors from Chapter 7 relief.
A STEP IN THE RIGHT DIRECTION, BUT STILL ROOM FOR IMPROVEMENT
The HAVEN Act was certainly a step in the right direction toward protecting veterans and their families in bankruptcy proceedings. While the Act may reduce the amount of money certain creditors recover through the bankruptcy process, it also shifts the balance toward protecting disabled veterans and the available limited income they have at their disposal. Hopefully, Congress is working on additional exceptions for veterans in these extraordinary times.
As always, if you are experiencing extreme financial difficulty or are confused about your veteran benefits contact an attorney who can assist you. If you would like to speak to one of the legal professionals at West & Dunn about this or any other legal issue, please feel free to call us at (608) 490-9449 or contact us online.