Service members who receive a re-enlistment bonus or incentive pay and then leave the service before their re-enlistment period is completed can be faced with a large repayment obligation. Can this debt be discharged in bankruptcy?

In most cases, the answer is no. However, the debt can be discharged if the bankruptcy discharge is entered more than five years after—

(1) the date of the termination of the agreement or contract on which the debt is based; or

(2) in the absence of such an agreement or contract, the date of the termination of the service on which the debt is based.

If you owe the government for a bonus, incentive pay, or similar benefit, the timing of your bankruptcy case is very important. If possible, it may be advisable to wait until the five year period has expired before filing.

However, even if the debt is non-dischargeable in a Chapter 7 bankruptcy, you may still be able to deal with it through Chapter 13. Under Chapter 13, the debt, along with your other debts, is dealt with through a payment plan that is based on your income, your expenses, and the type of debts you owe. A debt to the government can often be paid through Chapter 13 without penalties and interest, and you are protected from collection activities while the plan is going on.

If you are considering bankruptcy to deal with debts owed to a government agency, it is critical to get advice from an experienced bankruptcy attorney.