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National Guard and Reservist Exemption from Means Test

National Guard and Reservist Exemption from Means Test

This article is a reprint from the ABI Legislation Newsletter.

An Analysis of the “National Guard and Reservist Debt Relief Extension Act of 2011”

By Karen Cordry

In 2008, Congress enacted the National Guard and Reservists Debt Relief Act of 2008 which allowed servicemembers, who have served on active duty for at least 90 days to be exempt from completing and satisfying the means test requirements set out in Section 707(b)(2)(A) in a Chapter 7 case filed between December 19, 2008 and December 19, 2011.  The exemption must be claimed while the servicemember is on active duty or with 540 days after they have completed a minimum 90-day period of service to claim the means test exemption. Servicemembers who completed their service periods dating as far back as June 28, 2007, may thus be eligible for the exemption if they filed for bankruptcy relief on December 19, 2008.  In June 2011, a bipartisan group of six house members, ranging from Steven Cohen (D-TN) and John Conyers (D-MI) to Dana Rohrabacher (R-CA), introduced legislation (H.R. 2192) to extend the expiration date for another four years.

As part of the 2008 law, the General Accounting Office was tasked with providing information on the use and effects of the means test on servicemembers, as the test was amended by the act.  The GAO provided that report in December 2010 (it is available at http://www.gao.gov/new.items/d101014r.pdf.)  According to the GAO, its study objectives included determining the extent to which eligible National Guard members and Reservists claimed the exemption, the characteristics of these cases, the extent to which eligible debtors attributed their debt to their active duty, and the effects, if any, that the Debt Relief Act and on the bankruptcy system, creditors, and the debt practices of the eligible debtors (such as whether they had used the exemption as a reason to run up debt or otherwise abuse the system).

The GAO study determined that 2,122 eligible servicemembers filed a petition for Chapter 7 bankruptcy relief during the first year the Debt Relief Act was in effect (i.e., 2009).  Of that number, only 8 percent (or 176) eligible servicemembers actually claimed the means test exemption.  The 2,122 filers represented .3 percent of the total of 701,309 active servicemembers who potentially could have filed for bankruptcy during our review period.  (The 2,122 filers also represented about .2 percent of the approximately 1 million total Chapter 7 bankruptcy filings during that year.)  The GAO Report noted that the total amount of debt reported by the 2,122 filers was in excess of $40 million, of which about $13.8 million was nonpriority unsecured debt that was likely to be discharged, so that the median dischargeable debt was about $650,000.

The GAO Report was hampered in drawing any definitive conclusions in many areas because bankruptcy petitions do not capture the sort of date that it was looking for.  The Report noted that it could find no clear indications of abuse or potential abuse of the exemption.  (It did find that some 122 ineligible parties had claimed the exemption but was unable to determine if this was anything but innocent error.)  The Report was asked to determine whether, for those claiming the exemption, their military service had contributed “substantially” or “materially” to their debts but could not do so due to the absence of information in the files about the reason for the bankruptcy.  The report drafters did attempt to speak with 28 of the 176 exemption users but were only able to contact 11 in the end (a number the report did not view as generalizable).  Of that number, 10 of the 11 did not attribute their debts to their military service.  The GAO was also asked to determine if average levels of debt increased before, during, or after military service but again could not obtain that information from the files.  Of the 11 contacted, 7 stated that their debt had decreased or remained the same during their military service and six indicated that income from their military service was financially beneficial to them.

Based on their interviews with administrators of the bankruptcy system and officials from creditor and bankruptcy associations, the Debt Relief Act appeared to have had minimal effects on the bankruptcy system and creditor operations – not surprising in light of the very minimal number of parties electing the exemption.  The changes needed to implement the exemption were minimal and trustees stated that Act had little or no effect on the resources they expended in cases. Similarly, creditor associations reported little or no effect on their operations.

The Report also concluded that there was little evidence that the Act changed debt incurrence practices of eligible servicemembers largely because debtors generally have only a small awareness of the details of bankruptcy law and practices.  Information from those working with debtors suggested to the GAO that very few servicemembers were even aware that this right existed.  (Based on the small number of actual filers that  elected the exemption, it seems clear that the existence of this benefit is almost wholly unknown to everyone (including debtors’ counsel) so it could hardly be thought likely to create any incentives for abusive incurral of debt.)

Based on the breadth of the political opinion represented by the co-sponsors, it seems likely that this is one of the few non-controversial bills likely to emerge from Congress this year.  The original legislation (and the parameters of the GAO study) clearly considered it possible that military service in the reserves might be a contributing factor to bankruptcy filings and, if so, removal of the means test requirement was an attempt to mitigate the hardships created by such filings.  The numbers of filers to date are so small (particularly those who actually have exercised the exemption) that it is difficult to tell much or anything about the effect of the exemption itself.  And, while the number of actual filers that the GAO talked to is too small for any meaningful conclusions, the relatively small absolute number of filings would appear to argue against there being a large effect from the military service.  The fact that the vast majority of such filers did not use the exemption also suggests there is a major educational effort still needed to bring this benefit to the attention of debtors’ counsel.

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