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In Over Your Head? Bankruptcy Options for Service Members

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Posted in Articles, Auto Loans

BankruptcyBankruptcy: It’s an ugly word. It shoulders negative connotations and uneasy feelings for all those involved. Yet in the last year alone, nearly 1.5 million non-businesses struggling with debt repayment opted for this form of insolvency. As today’s economic climate affects more and more Americans, veterans included, the bankruptcy option is increasingly being utilized.

In essence, bankruptcy is used to discharge outstanding debt. From medical bills to payday loans, to tax obligations from the IRS, bankruptcy operates as an injunction stopping any and all creditor activity. For many, it offers a fresh start to a life enveloped by debt.

Types of Bankruptcy

Chapter 7 Bankruptcy

There are four basic types of bankruptcies: The most common being Chapter 7. Exercised mainly by individuals, Chapter 7 bankruptcy can also be used by businesses. Anyone who resides in and/or owns property or a business in the United States is eligible to file for Chapter 7 bankruptcy.

Considered the most severe option, a trustee is appointed to the individual who then collects and sells their assets for cash. Assets exempt under federal law are precluded from the aforementioned liquidation.

Active-duty service members are also eligible to discharge all debt owed to the Army and Air Force Exchange (AAFES) and Military Star, under Chapter 7. Additionally, amendments made in 2005 have made Chapter 7 more accessible to service-members and veterans.

Any debtor on active duty or homeland security detail when debts were incurred are now classified as “special circumstance” cases, and qualified for relief under Chapter 7. Nevertheless, one must keep in mind the result of filing for bankruptcy will affect an individual’s credit score negatively for ten years.

Chapter 11 Bankruptcy

Due to its expense and complexity, Chapter 11 bankruptcy is exclusively used by businesses. When a company is in need of debt restructuring, Chapter 11 is appropriate. Allowing for the reorganization of finances, this form of bankruptcy does not require a business to liquidate its finances, unlike Chapter 7.

Instead, a business may keep many of its assets in order to stay open. A trustee is then appointed and involved in the reorganization process, assuring the owners manage their assets accordingly. The aim of Chapter 11 is to reestablish profitability for a company.

Chapter 12 Bankruptcy

Less daunting and expensive than Chapter 11, Chapter 12 bankruptcy was devised for fishermen and farmers.  With an annual income dependent on seasonal work, fisherman and farmers are able to carry out a plan to repay their debts by opting for Chapter 12.

A debtor must voluntarily file a petition in order to apply for relief under this chapter. The intention of Chapter 12 ensures a debtor’s income is sufficient to make payments under this wholly unique plan.

Chapter 13 Bankruptcy

Chapter 13, also called “individual reorganization,” was tailored for individuals and small businesses with stable sources of income. Those unable to qualify for Chapter 7 frequently turn to Chapter 13 bankruptcy in order to keep their assets while gaining a better handle on their debts.

To qualify, a debtor must undertake a “means” test and prepare a repayment plan. Ultimately, this chapter does not completely liquidize debt, as does Chapter 7. Alternatively, a debtor must repay at least some portion of total debt within a three-to-five year period.

Bankruptcy and Service Members

One particular concern for service members regarding bankruptcy involves the issue of clearances. Although the status of a security clearance can be negatively affected, is it not automatic.

An individual’s chain of command is required to review the circumstances that led up to the filing for bankruptcy. If, for example, medical bills or family tragedy was the primary cause for bankruptcy as opposed to irresponsible financial decisions, it makes for a stronger argument to preserve clearances.

Other factors such as job performance and personal recommendations by platoon members can help in preserving security clearances. At the end of the day, financial responsibility–including government approved bankruptcy options, can only help in safeguarding security clearances.

For nearly 1.5 million Americans, bankruptcy has been the option of choice. Although steeped in negativity, this regrettable government alternative can offer a fresh start to many families and businesses. Unfortunately, with current economic conditions present in the United States today, it’s safe to say we’ll see more Americans filling for bankruptcy. The big question is, which type is best for you?