Members of the armed forces encounter extraordinary psychological and physical circumstances and their service to the nation is undeniably invaluable. However, this does not preclude them from debt-related financial issues.
If anything, the frequent relocations, spouses and partners being rendered jobless because of the moving around, the heightened risk of life-altering injuries in their line of work, and the lower job prospects once they enter civilian life, all threaten their financial wellbeing.
In fact, military members are often more vulnerable to messy debt situations than regular folks. Don’t believe the words because-
The numbers speak for themselves!
- According to a 2015 study, armed services personnel had nearly 10% higher unsecured debts than civilians.
- Nearly 20% of military members and their spouses/partners were dissatisfied with their financial situation.
- Over 10% of junior enlisted members had written bad checks.
- More than 40% had in excess of $5,000 in credit card debts
- Almost 40% of military families reported problems with their financial obligations.
- An estimated 10% were late in making at least one mortgage payment in the last 2 years.
Blame these alarming figures on poor debt and financial management or on an increase in living expenses, the fact is that a problem clearly exists. So, if you find yourself struggling with debt, you are certainly not the only one!
The bare minimum does not sort the problem!
When faced by a debt crisis the easiest and most obvious approach is paying the bare minimum. Unfortunately, this is never really enough. Make no mistake; this actually raises your debt obligation by increasing your interest payments, month after month. Then, there comes a time when it becomes impossible to make even the minimum payment, and that is when the downward spiral starts.
But, it does not have to be this way. As a veteran or an active member of the armed forces, you do get several options for debt relief, more so than regular folks. However, it is crucial to pick a solution that will be appropriate for your specific situation.
Continue reading to know more about military & veteran debt relief options and how to choose a workable and effective solution to rid yourself of the burden of debt.
Know what you are up against!
As an individual trained to handle combat situations, you know this better than anybody that before you head to war, it is imperative to size up the enemy. So, start by getting all those credit card bills on the table.
- Make a list of all the balances, separating your secured debts (home loan, car loan, any debt with collateral involved) from your unsecured debts (credit cards, personal loans, student loans).
- In another column, list all your expenditures for every month. No need to be lavish but do be realistic with your sense of frugality and austerity.
- Finally, note down the monthly earning/income of the household. You can include your salary and the earnings of your partner/spouse or any other contributor to the earnings, as long as they are willing to share the debt burden with you.
- Deduct the monthly payment for all your secured loans, insurance payments and your monthly expenditure from the total earning. The balance is the amount of money you have left to deal with your unsecured loans.
- Add the minimum monthly payment of all your unsecured loans and deduct this total from the remaining portion of your earning (calculated in step 4).
- After the deduction in step 5, what you have left back should be enough to cover 5% of the total balance of unsecured debts or 15%-20% of the capital of the debt with the highest interest rate. The idea is to make the minimum payment plus 5% of the total capital. This way, you can come clean in about 2 years.
- The second approach is to clear one loan at a time. In this case, the goal is to clear the highest interest debt within 5 months and then move on to the second-highest interest loan and so on.
If you don’t have that much balance left after the deductions, look at the options listed below
While you’re crunching all those numbers, also reflect on whether any of these unsecured debts were picked up before you enlisted. One of the protective aspects of the Service Members Civil Relief Act (SMCRA) caps the interest rate for all debts (including credit card debt) taken out before enlisting at 6%.
If you consider the standard interest of 15% levied by most credit card companies, this alone can amount to huge savings every quarter. All you have to do is write to your credit card company and send your military orders along with your application/letter. The best part is that receiving this benefit will not negatively influence your credit score.
The truth about Military & Veteran Debt Relief
A lot of people confuse debt relief with debt cancellation and debt forgiveness. The very first thing that you need to understand is that no creditor will simply forgive or cancel your debt. Yes, they may forgive a part of it, if they are willing to settle for less than what you owe.
But, there is no such thing as complete forgiveness of debt when it comes to credit card debt and other forms of unsecured loans. As far as secured loans go, the lender can simply move to acquire the asset/collateral and liquidate it to recover their money.
Debt relief simply offers a way to make the debt more manageable by limiting the amount of interest charged on the loan or by offering other options to settle/repay it. In simple words, the debt isn’t going away, you will still have to pay all or at least a large portion of what you owe. That said, take a look at some of the military service member-exclusive debt relief programs available for you:
There are three requirements you need, to qualify for PAYE:
- Think of this as a recent form of the SMCRA, one that is more expansive. It covers active-duty members of the armed services as well as their family members. The Act caps interest rate at 36% for all consumer credit products, inclusive of many fees. The products covered include payday loans, overdraft loans, vehicle title loans, and others.
- This helps veterans and their family members to refinance an existing home loan, to buy a home on loan and to keep their existing home.
- This has already been discussed above briefly. SMCRA covers all 7 branches of the armed services and while the MLA deals with loans taken out while military members are in active service, the SMCRA covers debt that is incurred before enlisting. As stated above, it caps the interest rate at 6%.
- This only applies to the student loans of veterans who were rendered disabled due to an injury sustained in the line of duty. The program offers a complete discharge of the student debt of such veterans.
- The program only applies to VA loans and is a form of settlement that does not call for the mediation of an outside agency. The compromise can only be availed if the debt was incurred due to an educational loan, home loan guarantee or overpayment of benefits.
How does military and veteran debt consolidation work?
Debt consolidation simply involves taking out one large loan to pay off smaller loans. Now, a lot of people may question the logic behind the approach. So, here is a quick explanation. The larger loan is usually secured debt that comes with a fixed and most definitely a lower interest rate than the unsecured loans that it will be used to pay off.
Consider the example of credit card debt. The effective annual rate often works out to a massive 36%. Plus, you have to pay more for finance charges, over-limit and late payment penalties and an increase in interest rate, and you have to do this for every card you hold and have used. No wonder people spiral down the debt hole by paying the bare minimum.
So, taking one large loan to settle these small debts can significantly lower your overall debt burden and make your payment more manageable. For civilians, the options include personal loans, home equity loans and borrowing from friends or family. But, if you are a veteran or a military member, and particularly if you already have a VA home loan, you will qualify for a VA consolidation loan or Military Debt Consolidation Loan (MDCL).
Here is what you need to know about Military Debt Consolidation Loan
This is, in essence, a “cash-out” loan, which means you are refinancing your current home loan for the amount you already owe on your existing mortgage, plus some more. The maximum loan amount cannot and will not exceed the appraised value of your home.
For example, if your house has an appraised value of $200,000 of which you have paid off $25,000, you can refinance your existing loan with an MDCL of $200,000. This would leave you with $25,000 extra minus the closing costs, to pay off your unsecured loans.
The benefits: The VA stands as the guarantor for your new loan and you get a longer term of 15, 20 or even 30 years, which means you get multiple options to ensure that the repayment sits well within your financial limits. Also, your credit rating will not be hit by debt consolidation nor is your credit score a consideration when taking out an MDCL.
The drawbacks: You are taking on more debt and losing the built-up equity in your home at the same time. This means that if you default on the loan, you could end up losing your home. Also, there are closing costs to consider, which is basically money lost because it is deducted from the balance given to you in cash after refinancing your existing home loan.
What if you don’t qualify for debt consolidation?
If for some reason you are not eligible for MDCL, you could settle your existing unsecured loans with veteran and military member-specific credit cards. These typically have no annual fees and won’t levy charges for balance transfers, transactions outside the US and cash advances. Some options include:
- Air Force Federal Credit Union credit cards
- Navy Federal Credit Union credit cards
- Credit cards granted by Army credit unions
- Visa Veteran Tickets credit cards
- Chase military credit cards
Once again, you need to understand clearly that you are merely changing the debt from one form to another. In this case, you are simply going from one lender to another. The debt will remain.
This means you will need proper financial management and a clear and effective repayment plan to erase those debts. Moreover, these cards have their own pros and cons. Although you can make a choice on your own, it would be wise to consult a reputable debt settlement firm.
The need of the hour- More than just money!
Debt is both sticky and complicated business. While it is easy to find yourself entangled in a debt crisis, getting out takes both effort and experience in sorting debt repayment issues. We have several qualified credit counselors working with us.
They have years of experience handling military and veteran debt, including student loans taken out by veterans and active-duty military members. Call us today and we will chalk out a plan to handle your debt in the most effective manner. It is possible to be debt-free. But, it is going to take commitment and discipline and just a bit of help from the outside.
As a member of the armed forces, we are sure that there are few individuals out there who have the same degree of focus, dedication, and discipline as you do. What we offer is that extra bit of help and an unbiased perspective and solution to sort your debt woes. So, get in touch right away because we can help you to tackle the debt before it tackles you and your life!