Eliminating a cruel quirk in federal bankruptcy law, legislation signed into law by President Trump on August 23, 2019, protects veterans disability benefits from creditors in bankruptcy proceedings.
"By protecting their disability compensation during bankruptcy, we can help [veterans] and their families regain financial stability," said Sen. John Cornyn (R-TX), a sponsor of the bill, after the Senate passed the measure, according to the Military Times.
Federal law provides individuals two main types of bankruptcy. In Chapter 7 bankruptcy, creditors seize essentially all of the person’s assets, minus a minimal amount to allow the person to meet essential needs, thus allowing the person a clean start. With Chapter 13 bankruptcy, people retain their assets, but enter a court-approved payment plan to pay down their debts. After the payment plan is completed, the remaining debts are discharged.
Chapter 7 typically takes three to five months, while Chapter 13 normally takes three to five years. Chapter 7 is only available to people with incomes below the median income for their geographic area.
Under federal law, Social Security disability benefits, including both Social Security Disability Insurance and Supplemental Security Income, are excluded from a person’s disposable income, meaning that these assets cannot be seized by creditors. They are also not included as income for the purposes of determining whether a person is eligible for Chapter 7 bankruptcy, although they are included in calculating a person’s repayment plan in Chapter 13 bankruptcy.
The Honoring American Veterans in Extreme Need (HAVEN) Act amends the U.S. Bankruptcy Code to apply these same rules for people who receive veterans disability benefits.
About 15 percent of bankruptcy filers each year are veterans, despite accounting for only about 10 percent of the general population.
“Forcing 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,” Sen. Tammy Baldwin (D-WI), a bill co-sponsor, said in a news release. “I am proud to have worked across party lines to get this reform done and deliver results for our veterans and their families.”
Federal law does not provide the same exceptions for private disability benefits, such as those obtained via employment, although many states have their own exceptions.
This information is not intended to be a substitute for specific individualized tax, legal or estate planning advice as individual situations will vary. Neither Royal Alliance Associates, Inc., nor its registered representatives or employees, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.
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