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Does VA Disability Count as Income in Bankruptcy?
No. VA disability compensation does not count in the bankruptcy means test.
If you added your disability check to your pay, came out over the median, and gave up on Chapter 7, run the numbers again. Leave the disability check out this time.
A federal law called the HAVEN Act took disability-related VA and military payments out of the income figure the means test runs on. If that check is what pushed your household over the line, you may qualify for Chapter 7 after all.
What does the HAVEN Act leave out of your income?
Monthly payments from the VA or the military that are paid because of a disability, a combat-related injury, or the death of a service member.
In plain terms, these no longer count toward your income on the means test:
- VA disability compensation, at any rating
- Special Monthly Compensation
- Dependency and Indemnity Compensation paid to a surviving spouse or child
- Combat-Related Special Compensation
- Disability severance pay
Social Security has always been left out of the means test. The HAVEN Act puts veterans’ disability pay on the same footing.
What still counts?
Regular military retirement pay. A twenty-year pension with no disability attached is ordinary income on the means test.
Disability retirement is the harder case. If you were medically retired, only the part of your retired pay above what your regular retirement would have been is left out. I work that number out from your retirement orders and your DFAS retiree account statement.
A VA pension paid on age alone, with no disability behind it, does not fit the exclusion either.
Can a disabled veteran skip the means test entirely?
Yes, if two things are true.
First, you are a disabled veteran under federal law: you have a VA rating of 30 percent or more, or you were discharged for a disability incurred or aggravated in the line of duty. Second, most of your debt was run up while you were on active duty or performing homeland defense activity.
The second part is where most veterans fall out. Credit cards opened years after discharge don’t qualify. But if the debt dates to your time in service, the means test does not apply to you at all.
Guard and Reserve members called to active duty for 90 days or more have a separate, temporary exclusion. It runs while you serve and for 540 days after release. Ask me whether your dates fit.
Does this help in Chapter 13?
It can. A Chapter 13 plan payment starts from the same income figure the means test uses. Take the disability pay out of the starting number and the required payment can drop.
The income still goes on your bankruptcy schedules, so the court sees your whole budget. What changes is the figure your payment is built on.
If your income is over the line for Chapter 7 even without the disability pay, Chapter 13 may still work.
Can creditors take my VA disability?
Most can’t. Federal law protects VA benefits from creditors, attachment and levy, both before and after the money reaches you.
The weak spot is your bank account. When disability deposits sit in the same account as your paycheck, a creditor with a garnishment order can freeze the account and make you prove which dollars are protected. Keep VA deposits in their own account, and read my post on bank account levies if a freeze has already happened.
In a Virginia bankruptcy, a veteran with a service-connected rating of 40 percent or more gets an extra exemption on top of the regular homestead exemption. The rest of the Virginia exemptions are here.
What should I bring to the consultation?
Three things.
Your VA benefits letter showing your rating and monthly amount. Your DFAS retiree account statement if you draw any military retirement, plus your retirement orders if you were medically retired. And six months of pay stubs and bank statements, because the means test looks back six months.
With those in hand, I can tell you which chapter fits.
Don’t trust the calculator
Tens of thousands of veterans live and work around the Pentagon, Fort Belvoir, Quantico and Joint Base Andrews. An online means test calculator that adds your disability check to your pay gives you the wrong answer.
If you still hold a clearance, my post on bankruptcy and the SF-86 covers what filing means for it.
I file in the bankruptcy courts for the District of Columbia, the District of Maryland in Greenbelt, and the Eastern District of Virginia. If you’ve been told you make too much for Chapter 7, bring me your benefits letter and I’ll run the numbers with you.
Call (202) 448-5136. The consultation is free.
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