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Reprinted from June 2004 ABI Journal June 1, 2004

Web posted and Copyright © June 1, 2004, American Bankruptcy Institute.

Bankruptcy Impact on Military a Concern to Pentagon, Congress

he Iraq War has caused extended tours of duty for many in the armed forces, resulting in increased financial strain for military families on active duty. While the major causes of personal bankruptcy (unemployment or catastrophic medical expense) are not factors confronting active duty military, the Pentagon has been increasingly concerned about the bankruptcy filing rates and credit practices of servicemen and women. Financially unprepared personnel threaten the military mission and also face revoked security clearances, nonjudicial punishment, redeployment and financial anxiety. Last year, the DoD formally launched a financial-readiness campaign to address military members' traditionally poor financial habits and increase financial-management awareness, savings and protection against predatory practices. More than 15,000 service members are now a part of a network of help provided by 60 national nonprofit credit counselors, government and business organizations pursuant to a campaign managed by the Consumer Federation of America. The America Saves campaign motto is "Financially Fit; Mission Ready."

Congress also has a heightened awareness of this financial stress and has authorized increased cash compensation—increases in basic pay, housing allowances and special pays—for active duty military for each fiscal year between 2000 and 2004. These pay increases exceeded rates enjoyed in the private sector. And new changes to the tax code under the Military Family Tax Relief Act of 2003 fix a number of provisions that previously put service members at a disadvantage for tax savings. For example, the law (a) loosens the rules for exclusion of capital gains earned from the sale of a primary residence for service members called to active duty, (b) excludes from taxable income homeowners' assistance payments made to service members for declines in property value, (c) doubles the military death benefit from $6,000 to $12,000 and makes the entire amount tax-free, and (d) creates an above-the-line deduction for travel expenses not reimbursed for those in the National Guard or Reserves.

In addition, some or all of the income that active-duty personnel earn while in combat zones is also tax-free. Service members who re-enlist while serving in a combat zone are typically eligible to receive any applicable re-enlistment bonus tax-free. This DoD program has grown from $418 million in 1999 to more than $734 million in 2003, a 76 percent increase.



 

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