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Concerning your question about converting your Chapter 13 into a Chapter 7, and then negotiating with your lender, the answer is, "yes," you can do this, provided that your income meets the requirements of the "means test."
Concerning the veteran's disability being nontaxable income, the U.S. Bankruptcy Code considers all income, except Social Security, in the means test calculation. The fact that your veterans disability is not taxable does not matter in bankruptcy court. However, the means test does not apply to a veteran if his or her indebtedness occurred while on active duty, or during a homeland defense activity.
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