Effect of bankruptcy on the service members’ civil relief act (SCRA)

The Servicemembers’ Civil Relief Act (formerly the Sailor’s and Soldiers Relief Act), though not enacted specifically for bankruptcy cases, applies in bankruptcy cases as well as non-bankruptcy cases. The SCRA protects members of the military against the entry of default judgments and gives the court the ability to stay proceedings against military debtors. The ability to stay proceedings can go beyond the protection afforded by the automatic stay imposed under 11 U.S.C. §362 of the Bankruptcy Code. Filing a Chapter 7, Chapter 11, or Chapter 12 bankruptcy case does not preclude also seeking relief under the SCRA in addition to seeking bankruptcy relief.

Purpose of the SCRA

The SCRA applies to all active duty members of the armed forces, including the activated National Guard, the Commission Coorps of the National Oceanic and Atmospheric Administration (NOAA), and the Commission Coorps of the Public Health Service. The SCRA was drafted to strengthen and expedite the national defense by giving members of the armed forces protection in civil actions. By providing for the temporary suspension of judicial and administrative proceedings and transactions that may adversely affect service members during their military service, the SCRA enables military personell to focus their energy on the defense of the United States. The SCRA provides for forbearance and reduction of interest on certain obligations incurred prior to military service, and it restricts default judgments against servicemembers and rental evictions of servicemembers and their dependents. The SCRA applies to all members of the United States military on active duty, and to U.S. citizens serving in the military of United States allies in the prosecution of a war or military action. The provisions of the SCRA generally end when a servicemember is discharged from active duty or within 90 days of discharge, or when the servicemember dies. Portions of the SCRA also apply to reservists and inductees who have received orders but have not yet reported to active duty or induction into the military service.

General Provisions

There are five primary areas of coverage under the SCRA: (1) protection against the entry of default judgments; (2) stay of proceedings where the servicemember has notice of the proceeding; and (3) stay or vacation of execution of judgments, attachments and garnishments; (4) reduction of interest rates; and (5) tenant protections.

Protection Against Default Judgements

The SCRA establishes certain procedures that must be followed in a civil proceeding to protect military member defendants against the entry of default judgements. These procedures are outlined below:

1. If a defendant is in default for failure to appear in the action filed by the plaintiff, the plaintiff must file an affidavit with the court stating whether the defendant is in the military or that the plaintiff was unable to determine whether the defendant is in the military.
2. If the court cannot determine whether the defendant is in the military, it may condition entry of judgment against the defendant upon the plaintiff’s filing a bond to indemnify the defendant against any loss or damage incurred because of the judgment if the judgment is later set aside in whole or in part.
3. The court can enter a judgment against the defendant if the defendant is in the military only after the court appoints an attorney to represent the defendant.
4. If requested by counsel for a servicemember defendant, or upon the court’s own motion, the court will grant a stay of proceedings for no less than 90 days if it determines that (1) there may be a defense and the defense cannot be presented without the defendant’s presence; or (2) after due diligence the defendant’s attorney has not been able to contact the defendant or otherwise determine if a meritorious defense exists.
5. The court may, in its discretion, make further orders or enter further judgments to protect the rights of the defendant under the SCRA.
6. If a judgment is entered against the defendant while he or she is in military service or within 60 days of discharge from military service, and the defendant was prejudiced in making his or her defense because of his or her military service, the judgment may, upon application by the defendant, be opened by the court and the defendant may then provide a defense. Before the judgment may be opened, however, the defendant must show that he or she has a meritorious or legal defense to some or all of the action.

Stay of Proceedings Where Servicemember Has Notice

Outside the default context and at any time before final judgement in a civil action, a military service member who has received notice of a proceeding may ask the court to stay the proceeding. The court may also order a stay on its own motion. The court will grant the servicemember’s stay application and will stay the proceeding for at least 90 days if the application includes: (1) a letter or other communication setting forth facts demonstrating that the individual’s current military duty requirements materially affect the servicemember’s ability to appear along with a date when the servicemember will be able to appear; and (2) a letter or other communication from the servicemember’s commanding officer stating that the servicemember’s current military duty prevents his or her appearance and that military leave is not authorized for the servicemember at the time of the letter. The court has discretion to grant additional stays upon further application.

Stay or Vacation of Execution of Judgements, Attachments and Garnishments

In addition to the court’s ability to regulate default judgments and stay proceedings, the court may on its own motion and must upon application: (1) stay the execution of any judgment or order entered against a servicemember; and (2) vacate or stay any attachment or garnishment of the servicemember’s property or assets, whether before or after judgment if it finds that the servicemember’s ability to comply with the judgment or garnishment is materially affected by military service. The stay of execution may be ordered for any part of the servicemember’s military service plus 90 days after discharge from the service. The court may also order the servicemember to make installment payments during any stay ordered.

Reduced Interest Rates on Existing Debts

Under the SCRA, many active duty military members are entitled to a six percent (6%) cap on interest rates for debts or financial obligations of any kind except for federally guaranteed student loans. To obtain the reduced rate, the service member must show: (1) that the military service member took out the loan before he began active duty; and (2) that the person’s military service materially affects his ability to pay the loan at the pre-service interest rate (ie, show that the service member is making significantly less money after being called to active duty).

An eligible service member may obtain the reduced interest rate by writing a letter to the lender to ask for a reduction in the interest rate as of the date active duty service began. The service member should include with that letter copies of the activation orders and paychecks, and any other evidence needed to show that the service member is making less money than he did prior to active duty service. Upon receipt of the required information, the lender must reduce the interest rate to six percent (6%) or less. Alternatively, the lender would need to contest the reduction in interest in a court of law. If it does not believe the reduction in income does not materially affect the service members ability to pay the interest on the loan. Until there is a court ruling following a challenge by a lender, the interest rate must remain reduced. After the active duty service is terminated, the loan will revert to its original contract interest rate.

Special Treatment for Tenants

Active duty service members may also be able to terminate residential lease obligations or avoid eviction on a lease. Tenants who enter active military service after signing a lease or rental agreement have a right to terminate that rental agreement for either residential or commercial real estate leases. The service member must mail written notice of his intent to terminate the tenancy, along copies of the activation orders, to the landlord or manager. For month to month rental agreements, the tenancy terminates thirty (30) days after the next rent payment is due following mailing of the notice. For written leases for a specific term of months, the tenancy terminates thirty days after the following rent payment is due.

The SCRA can also require a court to impose a stay against a residential eviction proceeding for non payment of rent for service members, spouses, children or other dependents that occupy a rental unit during the period of military service. The SCRA applies when the rent is less than $2,400.00 per month. If the service member’s military activation affects his or her ability to pay the rent, the judge may stay the eviction proceeding for up to three months. Otherwise, the eviction proceeding can continue.

Additional Protections

Several additional rights are available under the SCRA. For example, when an action for compliance with a contract is stayed under the SCRA, contractual penalties do not accrue during the period of the stay. 50 U.S.C. app. § 523. Also, a landlord cannot evict a servicemember or dependents from a primary residence without a court order. In an eviction proceeding, the court may also adjust the lease obligations to protect the interests of the parties. 50 U.S.C. app. § 531. If the court stay the eviction proceeding, it may provide equitable relief to the landlord by ordering garnishment of a portion of the servicemember’s pay. Id. Under the SCRA a servicemember may terminate residential and automotive leases if he or she is transferred after the lease is made. 50 U.S.C. app. § 535. A court may also extend some of the protections afforded a servicemember under the SCRA to persons co-liable or secondarily liable on the servicemember’s obligation. 50 U.S.C. app. § 513.

Applicability to Bankruptcy Proceedings

The language of the SCRA states that it is generally applicable in any action or proceeding commenced in any court. 50 U.S.C. app. §§ 521, 522 and 524. Therefore, absent contravening language with respect to bankruptcy proceedings, the SCRA applies to all actions or proceedings before a bankruptcy court.

The applicability of the SCRA in bankruptcy proceedings is also evident in the Federal Rules of Civil Procedure and the Federal Rules of Bankruptcy Procedure. For example, the advisory committee note to Federal Rule for default judgments, Fed. R. Civ. P. 55(b), states that it is directly affected by the SCRA. (2) Under Fed. R. Bankr. P. 7055 and 9014 of the Federal Rules of Bankruptcy Procedure, Fed. R. Civ. P. 55 is applicable in bankruptcy adversary proceedings and contested matters. Thus, the default judgment protections of the SCRA clearly apply in bankruptcy cases.

The bankruptcy court clerk’s office is aware of the requirement that the plaintiff provide an affidavit stating whether the defendant is in the military before default may be entered against the defendant. Bankruptcy Procedural Forms B260, B261A, and B261B, and their accompanying instructions, provide additional guidance concerning the applicability of the SCRA to default judgments and related procedural requirements.

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