Bankruptcy for Veterans and Military Members: What You Need to Know

Military service can bring unique financial challenges—from frequent moves to service-related injuries, to difficulty transitioning to civilian life. If you’re a veteran or active-duty service member struggling with debt, bankruptcy can offer a fresh start—and the law provides special protections for you.

Thanks to legislation like the HAVEN Act, and exemptions available under both state and federal law, bankruptcy is often more accessible and beneficial for military families than many people realize.

The HAVEN Act: A Game-Changer for Disabled Veterans

Passed in 2019, the HAVEN Act (Honoring American Veterans in Extreme Need) excluded certain military benefits from being counted in the Chapter 7 means test—helping more veterans qualify.

✅ What Income Is Excluded from the Means Test?

Veterans can now exclude the following from their current monthly income (CMI) calculation:

• VA Disability Compensation

• Combat-Related Special Compensation (CRSC)

• Disability Severance Pay

• Special Monthly Compensation (SMC)

• Survivor Benefit Plan (SBP) Annuities

• Military retirement benefits tied to disability

This is similar to how Social Security income is excluded. These benefits are also generally protected from creditors and not used to repay debt in bankruptcy.

⚠️ What Military and Veteran Income Is Still Counted in bankruptcy?

Not all military pay is excluded. The following still counts in the means test:

• Basic pay or base salary

• BAH (Basic Allowance for Housing)

• BAS (Basic Allowance for Subsistence)

• Bonuses or reenlistment incentives

• Military retirement that is not disability-based

Remember that even non-taxable income counts on the Means Test

Means Test Exemptions for Active-Duty Military and Recently Discharged Members

You may not have to complete the means test at all if you meet certain criteria.

You Are Exempt If:

• You are a disabled veteran (30%+ disability or discharged due to injury); AND

• Your debts were mostly incurred while on active duty or during homeland defense activities

OR

• You are a member of the National Guard or Reserves

• You were called to active duty after 9/11 for at least 90 days

This exemption can be used within 540 days after your active-duty period ends.

Real Example: How the HAVEN Act Helps

John, a 100% disabled veteran, receives $3,200/month in VA disability and $3,800 from a civilian job. Before the HAVEN Act, his $7,000+ income disqualified him from Chapter 7. After the HAVEN Act, only the $3,800 civilian income counts—making him eligible for Chapter 7 and allowing him to discharge over $50,000 in debt.

What Happens to VA and Military Benefits in Bankruptcy?

Most military-related benefits are protected in both Chapter 7 and Chapter 13.

• VA Disability Compensation is exempt from collection and cannot be taken by the trustee.

• Military retirement pay (from DFAS) is a protected assets, but is part of the calculation for disposable income. Your military pay cannot be taken from you, but it can be part of the calculation for determining if you have the ability to pay creditors and how much that payment would be.

• In Virginia, assets like homes held as Tenants by the Entirety (TBE) may also be protected for married couples without joint unsecured debts.

What About TSP Retirement Accounts?

Many veterans and federal employees have a Thrift Savings Plan (TSP).

• TSPs are federally protected retirement accounts—similar to 401(k)s—and are not counted as available assets in bankruptcy.

• Loans against your TSP are not dischargeable, but repayments continue as payroll deductions.

Military Overpayments and Recoupment Issues

Overpayments by VA or DFAS are common—and stressful. Here’s what to know:

• Most VA or military overpayments are treated as unsecured debts.

• In Chapter 7, they are typically discharged like credit card debt.

• In Chapter 13, you may be able to pay a portion or nothing at all, depending on your plan.

• The government can object to the discharge of the overpayment, if they have a basis that the debt was incurred due to fraud or misrepresentation. If there are any concerns about the debt, it is critical to review all facts with your attorney.

• Recoupment (offsetting your benefits) is a gray area. Sometimes bankruptcy can stop this, but it depends on the court and the jurisdiction.

Can Bankruptcy Help If I’m Behind on a VA Home Loan?

Yes. Many veterans come to us behind on a VA mortgage, often after job loss or transition from active duty.

• Chapter 13 can stop foreclosure and allow you to catch up mortgage arrears over 3 to 5 years.

• You can keep your house, even with equity, if exemptions (like homestead or TBE) apply.

• A VA loan is not canceled by bankruptcy, and you may still qualify for another VA loan in the future.

What About Security Clearances?

Security clearance holders often worry that bankruptcy will cost them their job. In many cases, it does not—and may even help.

• Filing proactively and addressing debt head-on often looks better than ignoring or hiding financial distress.

• You should always disclose bankruptcy to your security officer, but many military personnel retain their clearance after filing.

➡️ Read more: How to Handle Debt When You Have a Security Clearance

Can I File Bankruptcy While Deployed?

Yes—though it takes planning.

• You may file through an attorney with a special power of attorney (this works in limited situations and often requires specific language in the power of attorney)

• Many courts allow virtual 341 meetings, making remote filing possible.

• Be sure your spouse or agent can access financial documents.

What If My Spouse Isn’t in the Military?

Bankruptcy laws apply based on household income and debts, not just military status. Important points:

• You can file alone or jointly with your spouse.

• If your spouse is not liable for the debts, they don’t have to file.

• In Virginia, if the home is held TBE, it may be protected if there are no joint unsecured debts.

SCRA vs. Bankruptcy: What’s the Difference?

The Servicemembers Civil Relief Act (SCRA) provides protections outside bankruptcy, such as:

• Interest rate caps (6%) on pre-service debts

• Protection from default judgments

• Delays in foreclosure or eviction

But SCRA doesn’t eliminate debt. Bankruptcy may still be the better long-term option.

Extra Virginia Wildcard Protection for Disabled Veterans

In addition to the protections offered by the HAVEN Act and bankruptcy law generally, Virginia offers special exemption rights for disabled veterans.

If you are a veteran with a service-connected disability rating of 30% or higher, you are entitled to an additional $10,000 wildcard exemption under Virginia law.

How This Works:

• Virginia residents normally receive a $5,000 wildcard exemption (plus an extra $500 for each dependent or an extra $5,000 when you are 65 years or older).

• If you are a disabled veteran (30% or more service-connected disability), you get an extra $10,000 on top of that.

• This wildcard can be used to protect any type of property—cash, vehicles, investments, or other non-exempt assets.

This exemption can be critical if you:

• Own a second vehicle or a car with equity exceeding the normal vehicle exemption

• Have a bank account with a higher balance

• Own collectibles, tools, or other valuable property

Example:

A veteran with a 40% VA disability rating has $8,000 in a savings account. Normally, they would only be able to protect $5,000 using the standard Virginia wildcard. But because of their service-connected disability, they can claim an extra $10,000 wildcard—fully protecting their savings.

This protection helps ensure that disabled veterans can file bankruptcy without losing critical assets needed for stability or recovery.

Chapter 7 vs. Chapter 13 for Military Families

Frequently Asked Questions

Can bankruptcy discharge VA overpayments?
Yes. VA overpayments are treated like credit card debt and can usually be wiped out in bankruptcy.

Can bankruptcy discharge debts with related to the Military STAR card/Army & Air Force Exchange Service Card?
Yes. These debts are just regular credit card debt (despite being able to offset military pay) and can usually be wiped out in bankruptcy.

What happens to my TSP?
It is protected. You won’t lose your TSP in bankruptcy, and you can continue contributing if you’re employed.

Can bankruptcy help with divorce debt for a military member?
Yes, but be careful: child support and alimony are not dischargeable. Property settlement debts may be discharged in Chapter 13, not Chapter 7.

Can I use a family member’s credit card to pay attorney fees?
Yes. You cannot use your own card if it will be discharged, but someone else can pay your fees.

Final Thoughts

Veterans and active-duty military members often qualify for more bankruptcy protections than civilians, but few know about them. From income exemptions to asset protections, the system is designed to recognize your service—and help you move forward.

At Ashley F. Morgan Law, PC, we’ve helped many veterans and military families navigate bankruptcy with clarity, confidence, and dignity. Whether you’re dealing with debt, worried about foreclosure, or unsure about what benefits are protected, we’re here to help you understand your rights and options.