As a Service Member or Veteran, you have enough to worry about. Debt is likely the last thing on your mind even when it should be a priority. This provides an overview of the options available to you for consolidating your debt, what you should do before you deploy, and how you can deal with debt as a veteran.
Overall, the debt consolidation process for Service Members is similar to that of civilians, but there are additional programs in place that specifically help those who have served in Armed Forces to consolidate debt and take control of their personal finances.
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The Servicemembers Civil Relief Act
The most important piece of legislation you need to know about is the Servicemembers Civil Relief Act (SCRA). This law created a program for those in the military that need help with their debt. Provisions include things like reducing credit card debt and loan interest and postponing foreclosure and repossession. When you learn about this act, you will be able to better navigate your finances as a Service Member. Additionally, some debt agencies will waive or reduce fees for debt management programs for members of the military.
What does the SCRA do?
The Servicemembers Civil Relief Act does a lot to protect your finances as military personnel. There are seven main provisions of the law:
- Delay civil court cases
- Postpone foreclosures and repossessions
- Prevent evictions
- Protect against default judgments
- Terminate various contracts, such as leases
- Defer income taxes
- Reduce interest rates
That last provision is the most widely used. All of your interest rates, whether they apply to a car loan, student loan, personal loans, credit cards, or others, should legally drop to 6 percent while you are deployed. When it comes to debt consolidation, this is the factor of the SCRA that could help you the most.
Deployment is a stressful time, and there’s not much you can do for your finances when you’re already overseas. These are the main things you should finish beforehand to make sure your finances are secure while you’re away:
Consolidate your debt
If you’re going to consolidate your debts, then you definitely don’t want to do it while you’re already deployed. Trying to complete that process while you’re overseas can get very complicated. Define your consolidation plan before you deploy for the best results.
Set up special Power of Attorney
While you’re away, you can designate someone to manage your personal finances. If you want them to be able to change your allotments, you need to set up Power of Attorney for them. Power of Attorney forms and rules vary by state, so be sure to look up the correct information for your current state of residence.
Put credit cards and credit reports on freeze
Especially if you’re consolidating your debt, the last thing you want to do is rack up more credit card charges. Before your deployment, freeze your credit card accounts. This will prevent any charges and protect against identity theft.
You can also place an Active Duty Fraud alert on your credit report. When this is in place, creditors must take extra steps to confirm your identity before opening credit in your name. The alert remains in place for one year and can be renewed to match the length of your deployment.
Set payments in your 6 discretionary allotments
The money you earn while deployed can be taken directly from your paycheck and given to the person or business of your choice. You can set up six of these discretionary allotments. Arrange them before your deployment to make things simple.
Look into a Savings Deposit Program (SDP)
Service Members who receive Hostile Fire Pay/Imminent Danger Pay (HFP/IDP) can enroll in a Savings Deposit Program. A Savings Deposit Program (SDP) is a special savings account that earns ten percent interest. This is a much higher savings interest rate than you will get opening a regular savings account at any bank or credit union. Your debt’s interest is capped at six percent while you’re deployed, so one of your options is to only put money toward the SDP and make a large payment toward your debt when you get back.
Consider a debt management program
Debt management programs are great options for Service Members with high amounts of debt. When searching for a DMP, always mention that you are an active-duty member of the Armed Forces. You may be eligible for lower or eliminate program setup and administration fees.
As a Service Member, your interest rates should be reduced to six percent or lower because of the Servicemembers Civil Relief Act. If you’re enrolled in a debt management program, call your credit counselor to ensure that all of your interest rates have been changed correctly.
A Veteran’s Guide to Debt Consolidation
Veterans looking to consolidate their debt have a unique option called a Military Debt Consolidation Loan (MDCL). An MDCL is sometimes referred to as a VA debt consolidation loan. This can be financially risky, so it’s worth looking into other options, as well.
Military Debt Consolidation Loan (MDCL)
This kind of loan is a type of secured loan, meaning you are borrowing against an asset. This asset is usually your home. Essentially, a Military Debt Consolidation Loan is a home equity loan that can help you get out of debt. Before you take this route, here are some facts you should know:
- You must have a VA home loan to qualify.
- You will usually have to pay closing costs again to get the new loan.
- An MDCL increases your financial risk since the SCRA will no longer protect you against foreclosure.
- The MDCL will increase your monthly payment because the amount you are financing is higher.
- Market conditions matter and your interest rate on your MDCL will change depending on economic circumstances.
- If you don’t have equity, an MDCL won’t work because you have nothing to borrow against.
An MDCL is not your only option
Debt consolidation and debt management programs are also options for Veterans looking for debt relief. Neither of these requires you to borrow against your home equity. Depending on the amount of debt you have, these could be better options.
Also, if you’re the spouse of a military servicemember, you can also apply for an education benefit called MyCAA, or My Career Advancement Account. This allows you to pursue training or education for a high-demand industry, and the extra income from that career will benefit those military families looking to pay off debt.
The Bottom Line
Many of the options for consolidating debt as an active-duty Service Member or a Veteran of the Armed Forces are the same as those for civilians. However, it’s important to look into the laws and programs mentioned above to understand what extra help is available to you. You may also be eligible for reduced rates or waived fees for common solutions like debt management programs.
Article last modified on August 26, 2019. Published by Debt.com, LLC