The legislation, signed into law by President George W. Bush on Oct. 3, 2008, applies to debtors from the military reserves or National Guard who are seeking federal bankruptcy protection in the middle of or in the wake of military service. The debtor must be on active duty in the military service for at least 90 days. The law also applies to individuals called to active duty as reservists after Sept. 11, 2001.
What the Law Requires
The law, listed as Public Law No. 110-438, specifically forbids federal bankruptcy court from dismissing a case or converting a case from one chapter to another under bankruptcy law (such as from Chapter 13 to Chapter 7 proceedings) while the debtor is completing eligible duty in the military. The protection from such actions by the bankruptcy court also extends for a period of 540 days after completion of the eligible military service.
The debt relief law also directs the U.S. comptroller general to study and report back to Congress about how widely reservists and National Guard members use the provisions of the act; how many are debtors in federal bankruptcy cases that are related to their military service and how many qualify for benefits under the law. The comptroller general also must report to Congress on the impact of the law on the bankruptcy system, creditors and the debt-incurring behavior of eligible service members.
Rationale for the Law
The law is in part a response to the 2005 Bankruptcy Abuse Prevention Act, which toughened the standards for courts to discharge individuals' debt during bankruptcy proceedings. Those tougher standards include rigorous means testing, examining an individual's income and expenses for the six months before a bankruptcy filing, to qualify an individual for protection under Chapter 7 of bankruptcy law.
The problem, for National Guard members and reservists, is their pay can vary greatly between active duty and reserve status.
Pay Cuts and Unemployment
When National Guard members or military reservists are deactivated, their pay is reduced compared with the active-duty pay they received. Also, many such service members have taken a pay cut to serve on active duty in the military, compared with their predeployment civilian pay. And upon return from deployment, service members may struggle to find full-time work. The 2008 law provides a window for these men and women to put their finances in order before bankruptcy means testing applies.
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