Bankruptcy for Veterans

Veterans in New York City file for bankruptcy for the same reasons as everyone else: medical bills, a lost job, a divorce, a business that failed, or credit card balances that outgrew a fixed income. The difference is that veterans have protections most debtors do not. Federal law shields VA disability compensation from the means test and from creditors. Federal law also excuses certain disabled veterans from the means test entirely. New York's exemption statutes add another layer. A veteran who files without knowing these rules can end up in the wrong chapter, or lose property that the law would have protected.

Our firm represents veterans in Chapter 7 and Chapter 13 cases in the Southern and Eastern Districts of New York. This page explains how the rules work, with the statutes and worked examples you need to judge your own situation.

How VA Benefits Are Protected From Creditors

The starting point is 38 U.S.C. § 5301(a)(1). It provides that payments of benefits under any law administered by the Department of Veterans Affairs "shall not be liable to attachment, levy, or seizure by or under any legal or equitable process whatever, either before or after receipt by the beneficiary." The phrase "either before or after receipt" matters. A creditor with a judgment cannot garnish a VA check before it arrives and cannot seize the money once it is in your account, so long as the funds can be traced to VA payments.

Inside a bankruptcy case, that protection takes the form of an exemption. New York debtors choose between two exemption lists under Debtor and Creditor Law § 285: the federal list in 11 U.S.C. § 522(d), or the New York list in DCL §§ 282 and 283 together with CPLR 5205 and 5206. Veterans' benefits appear on both.

• New York list: DCL § 282(2)(b) exempts the debtor's right to receive "a veterans' benefit." DCL § 282(2)(c) separately exempts disability, illness, and unemployment benefits.
• Federal list: 11 U.S.C. § 522(d)(10)(B) exempts the right to receive "a veterans' benefit."
• Either list: 11 U.S.C. § 522(b)(3)(A) lets a debtor using the state list also claim exemptions under non-bankruptcy federal law, which includes 38 U.S.C. § 5301.

The choice between the two lists depends on what else you own. A veteran who owns a home in the five boroughs will almost always use the New York list because of the CPLR 5206 homestead exemption discussed below. A veteran who rents and has cash or a tax refund to protect may do better with the federal list and its wildcard under § 522(d)(5). Our page on bankruptcy exemptions compares the two lists item by item.

Bank Accounts and Commingled Funds

Problems arise when VA money sits in the same account as wages or other deposits. The exemption follows the VA funds, but you carry the burden of tracing them. Before filing, we review at least six months of bank statements and, where possible, recommend that VA deposits go into a dedicated account. Outside of bankruptcy, CPLR 5205(l) requires a bank served with a restraining notice to leave untouched a protected amount of directly deposited statutorily exempt payments, and veterans' benefits are on that list. That rule keeps the lights on while a case is prepared.

The HAVEN Act and the Means Test

Before 2019, VA disability compensation counted as income on the Chapter 7 means test. A veteran with a 100 percent rating and a modest job could be pushed above the New York median and forced into a five-year Chapter 13 plan funded largely by disability pay. Social Security recipients never faced this problem because Social Security was already excluded.

The Honoring American Veterans in Extreme Need Act of 2019 (the HAVEN Act) fixed the disparity. It amended the definition of "current monthly income" in 11 U.S.C. § 101(10A)(B)(ii) to exclude:

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.

In practice, the following payments are excluded from current monthly income:

• VA disability compensation at any rating percentage.
• VA pension paid to wartime veterans with disabilities, including Aid and Attendance.
• Dependency and Indemnity Compensation (DIC) paid to surviving spouses and children.
• Combat-Related Special Compensation (CRSC) and Concurrent Retirement and Disability Pay (CRDP).
• Chapter 61 disability retirement pay, to the extent it exceeds what the member would have received under ordinary longevity retirement.

Two common payments are not excluded. Ordinary military retirement pay based on years of service still counts as income. Post-9/11 GI Bill housing allowances and tuition payments also count, because they are education benefits, not disability payments.

Because Chapter 13 uses the same definition of current monthly income to calculate disposable income under 11 U.S.C. § 1325(b)(2), the HAVEN Act exclusion also lowers what a veteran must pay unsecured creditors through a plan.

Worked Example: A Bronx Veteran and the Means Test

A single veteran living in the Bronx has a 100 percent VA disability rating and receives roughly $3,700 per month in compensation. He also works part time and earns $2,800 per month. His household size is one.

Counting everything, his annualized income is $78,000, which exceeds the New York median for a one-person household published by the U.S. Trustee Program. He would have to complete the full means test in Official Form 122A-2, and his Chapter 7 case would likely be presumed abusive.

Under the HAVEN Act, his current monthly income is $2,800, or $33,600 per year. That is well below the median. He checks the box on Form 122A-1 indicating that his income is below the median, and no further means test calculation is required. He qualifies for Chapter 7 and keeps every dollar of his disability pay. Our guide to the means test in New York City walks through the forms line by line.

The Disabled Veteran Exclusion Under § 707(b)(2)(D)

Separate from the HAVEN Act, some veterans never have to take the means test at all. Under 11 U.S.C. § 707(b)(2)(D)(i), the means test does not apply if two conditions are met:

1. The debtor is a "disabled veteran" as defined in 38 U.S.C. § 3741(1), meaning a veteran with a service-connected disability rated at 30 percent or more, or a veteran discharged or released from active duty because of a disability incurred or aggravated in the line of duty; and
2. The debts were incurred "primarily" during a period in which the debtor was on active duty under 10 U.S.C. § 101(d)(1) or performing a homeland defense activity under 32 U.S.C. § 901(1).

Both conditions must be met. A 30 percent rating alone is not enough; the timing of the debt matters. We prove the timing by matching credit card statements, loan origination dates, and medical billing dates against DD-214 service dates and orders. Where more than half the total debt was incurred during qualifying service, the exclusion applies regardless of the veteran's current income.

Worked Example: Debt Incurred During a Deployment

A Queens resident served on active duty from 2016 to 2021. During a deployment in 2019, her spouse used joint credit cards to cover rent, childcare, and car repairs, and the couple took a $15,000 personal loan. After discharge she was rated at 40 percent for a back injury. Today she earns $95,000 as a nurse, and the couple owes $62,000, of which $48,000 was incurred between 2016 and 2021.

Her income would fail the means test under ordinary rules. But she is a disabled veteran under 38 U.S.C. § 3741(1), and roughly 77 percent of her debt was incurred while on active duty. She qualifies for the § 707(b)(2)(D) exclusion, checks the corresponding box on Form 122A-1Supp, and files Chapter 7 without completing the means test.

Reservists and National Guard Members

Section 707(b)(2)(D)(ii) provides a second exclusion. A member of a reserve component or the National Guard who was called to active duty or homeland defense activity after September 11, 2001, for at least 90 days is excluded from the means test while on duty and for 540 days after release. Unlike the disabled veteran exclusion, this one has no disability rating requirement and no debt-timing requirement.

Guard and Reserve members still on orders also have rights under the Servicemembers Civil Relief Act, 50 U.S.C. § 3901 et seq., including a 6 percent cap on interest for pre-service debts, protection against default judgments, and stays of civil proceedings. These rights operate alongside, not instead of, the Bankruptcy Code. In some cases, an SCRA stay of a foreclosure buys enough time to prepare a Chapter 13 case properly rather than filing on an emergency basis.

Chapter 7 or Chapter 13: Which Fits

Chapter 7 discharges most unsecured debt in roughly four months. A trustee is appointed to sell non-exempt assets, but in the large majority of New York City consumer cases there is nothing to sell because the exemptions cover everything. Chapter 7 fits veterans whose income is exempt or below median and who are current on any secured debt they want to keep.

Chapter 13 fits veterans who are behind on a mortgage or car loan, who have non-exempt equity, or who have debts that cannot be discharged in Chapter 7. The debtor proposes a three- to five-year plan under 11 U.S.C. § 1322. Mortgage arrears are cured over the life of the plan under § 1322(b)(5) while the regular monthly payment continues. The automatic stay under 11 U.S.C. § 362(a) stops the foreclosure the moment the petition is filed.

Worked Example: Saving a VA-Guaranteed Home in Staten Island

A veteran owns a house in Staten Island financed with a VA-guaranteed mortgage. After a layoff he fell $24,000 behind. The servicer has referred the file to foreclosure counsel. He is now employed again and receives $1,900 per month in VA compensation for a 60 percent rating.

He files Chapter 13 in the Eastern District of New York. His plan proposes to cure the $24,000 in arrears over 60 months at $400 per month, paid to the Chapter 13 trustee, while he resumes the regular mortgage payment directly to the servicer. Because his $1,900 in VA compensation is excluded from current monthly income, his projected disposable income for unsecured creditors is calculated on wages alone, and his plan pays those creditors a small percentage. At the end of five years he owns the house free of arrears, and the unsecured balance is discharged.

Veterans who own co-ops or condos face different mechanics because the security interest is in shares and a proprietary lease rather than real property. Our pages on co-op apartments in bankruptcy address those cases.

Debts Owed to the VA Itself

Veterans often owe money to the VA, and the treatment depends on the kind of debt.

• Compensation and pension overpayments: These are ordinary unsecured debts. They are dischargeable in Chapter 7 and Chapter 13 unless the VA proves fraud under 11 U.S.C. § 523(a)(2). The VA also has an administrative waiver process under 38 U.S.C. § 5302 that can be pursued before or instead of filing.
• Education benefit overpayments: Post-9/11 GI Bill and other education overpayments fall under 11 U.S.C. § 523(a)(8)(A)(i), which excepts from discharge "an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit." These survive bankruptcy unless the debtor proves undue hardship in an adversary proceeding.
• VA home loan deficiencies: When a VA-guaranteed loan is foreclosed and the VA pays a claim to the lender, the VA may seek reimbursement from the veteran. That debt is dischargeable. Filing before the VA offsets future benefit payments is the safer course.
• VA medical co-payments: Dischargeable as ordinary unsecured debt.

One related point: the VA cannot offset exempt VA compensation to collect a debt that has been discharged. If offsets continue after discharge, that violates the discharge injunction under 11 U.S.C. § 524(a)(2), and the bankruptcy court can order the money returned.

Protecting a Home and Vehicle Under New York Exemptions

The New York homestead exemption under CPLR 5206(a) protects equity in a home used as a principal residence. For property in New York, Kings, Queens, Bronx, and Richmond counties, the current figure is $179,975 per debtor. Married co-owners who file jointly may each claim the exemption, protecting up to $359,950 in combined equity. The figure is adjusted every three years.

New York's motor vehicle exemption under DCL § 282(1) protects $4,825 in equity in one vehicle. That amount rises to $11,975 if the vehicle is equipped for use by a disabled debtor, a provision that applies to many veterans with service-connected mobility impairments. A vehicle purchased with a VA automobile allowance under 38 U.S.C. § 3902 is also traceable to exempt funds.

Veterans over 65 face additional planning questions around Social Security, pensions, and retirement accounts. Our page on bankruptcy for senior citizens in New York City covers those issues.

Procedure: Where and How a Veteran Files in New York City

Court and Venue

Residents of Manhattan and the Bronx file in the U.S. Bankruptcy Court for the Southern District of New York at One Bowling Green. Residents of Brooklyn, Queens, and Staten Island file in the Eastern District of New York at 271-C Cadman Plaza East in Brooklyn. Venue is determined under 28 U.S.C. § 1408 by where you lived for the greater part of the 180 days before filing. Our debtor's guide to the One Bowling Green courthouse explains what to expect at the Section 341 meeting of creditors.

Credit Counseling

Every individual debtor must complete a credit counseling briefing from an approved agency within 180 days before filing, under 11 U.S.C. § 109(h)(1). Section 109(h)(4) waives the requirement for a debtor who is on active military duty in a combat zone, or who is unable to complete it because of incapacity or disability. The waiver must be requested by motion and supported by documentation.

Filing Fees

The Chapter 7 filing fee is $338 and the Chapter 13 fee is $313. Under 28 U.S.C. § 1930(f), a Chapter 7 debtor whose household income is below 150 percent of the federal poverty line may apply to have the fee waived. Because VA disability compensation is counted for the fee waiver even though it is excluded from the means test, some veterans will not qualify for a waiver but may pay in up to four installments under Fed. R. Bankr. P. 1006(b).

Timeline

In a Chapter 7 case, the meeting of creditors is held 21 to 40 days after filing. Creditors have 60 days after that meeting to object to discharge. The discharge typically enters about 90 to 120 days after the petition date. A Chapter 13 plan must be filed within 14 days of the petition under Fed. R. Bankr. P. 3015(b), and the first plan payment is due within 30 days under 11 U.S.C. § 1326(a)(1).

When a foreclosure sale, eviction, or bank levy is days away, the petition can be filed with the minimum documents and the rest completed within 14 days. Our page on emergency bankruptcy filings in New York City explains that process.

Documents We Need From Veterans

• DD-214 or other separation documents, with service dates.
• VA rating decision letter showing the disability percentage and effective date.
• VA benefit verification letter (available through VA.gov) showing monthly payment amounts.
• Six months of bank statements for every account into which VA funds are deposited.
• Six months of pay stubs and two years of tax returns.
• Credit card and loan statements showing account opening dates, needed to prove debt timing for § 707(b)(2)(D).
• Mortgage statements and any foreclosure papers, including the Certificate of Eligibility if the loan is VA-guaranteed.
• Any VA debt letters from the Debt Management Center.

Life After Discharge: VA Home Loan Eligibility

A bankruptcy does not end VA home loan eligibility. Under the VA Lenders Handbook (VA Pamphlet 26-7), a veteran generally becomes eligible for a new VA-guaranteed loan two years after a Chapter 7 discharge, and in some circumstances as early as one year where the bankruptcy was caused by circumstances beyond the veteran's control. A veteran in Chapter 13 may qualify after twelve months of on-time plan payments with the trustee's written consent. Lenders may impose stricter overlays, but the VA guaranty itself is available.

Veterans who hold or expect to seek a security clearance often ask whether filing will hurt them. Adjudicators generally view a bankruptcy that resolves debt more favorably than a stack of unpaid judgments and collection accounts. We address this question case by case during the initial consultation.

You can contact the Law Offices of Albert Goodwin by phone at 212-233-1233 or by email at [email protected].