Debt Management for Veterans

Americans have a long history with debt. At its peak in 2008, consumer debt reached a record $12.5 trillion. And veterans are no exception to the country’s debt dependence. In fact, studies show that military personnel generally carry more personal debt than their civilian counterparts; a quarter of military personnel with credit card debt owe $10,000 or more on those cards, compared with only 11 percent of civilians. Other debts common among military personnel are mortgages, auto loans and education loans.

Veterans and service members have special laws to help them stay out of debt and allow them to focus on their duties. For example, active duty service members cannot pay more than 6 percent interest on credit cards, can cancel their leases without penalty and, in most cases, cannot have their property foreclosed upon.

Still, outstanding debt remains a problem for veterans and active-duty personnel, even more so than for the typical American. The main goal of anyone in debt should be to pay down the total balances, however slowly, and avoid incurring further debt.

Like civilians, veterans have several options available to help them decrease their debt loads.

Debt consolidation is one of the most popular choices because it combines loans into a single payment and can reduce interest rates. Veterans can take on consolidated loans backed by the VA to receive better lending terms and lower interest rates.

Another common option for veterans and civilians alike is debt settlement, which can reduce the amount of money owed, potentially saving debtors thousands of dollars. Veterans may also be able to settle student loans and mortgages tied to the Department of Veterans Affairs (VA).

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Debt Consolidation

The general idea behind debt consolidation is to take out a brand new loan that’s as large as all of your other debts combined but likely has a lower interest rate. Then, you can use the new loan to pay off all of the other outstanding balances at once. In this way, you’re left with a single loan to worry about and keep track of, rather than several smaller ones.

A consolidated loan can be any type of loan.

Here are some of the most common ways to consolidate:
  • Take out a second mortgage.
  • Expand or refinance your existing mortgage.
  • Take out a personal loan.
  • Transfer balances to a low-interest credit card.

Although these choices are viable for veterans and civilians alike, veterans should consider taking advantage of their VA loan options. Such options are limited, but a loan through the VA can come with benefits like lower interest rates, higher loan amounts and better repayment terms.

To consolidate loans through the Department of Veterans Affairs, you need to refinance your mortgage with a cash-out option. This is a form of refinancing your existing mortgage, which can be traditional or backed by the VA.

With a cash-out refinance, you’ll adjust your current mortgage for a greater amount, thereby borrowing more money against your house. You’ll receive the additional money, which you can then use to pay off other bills. In this way, you’d combine all your debts into one large mortgage.

As with other loans through the VA, the administration will act as a co-signer in order to guarantee your loan.

Be aware that this is an involved process and requires a home appraisal, as the total mortgage cannot exceed the appraised value of your home. You must also meet certain qualifications to help ensure that you can and will repay the loan. Lenders will take into account your income and credit score when determining your eligibility.

You also need to realize that this process takes unsecured debt like credit card debt and turns it into secured debt. This means your home is acting as collateral and could be taken if you default on the new mortgage.

If you are not a homeowner or are otherwise ineligible for debt consolidation, look into debt settlement. This is a way of negotiating existing debts in order to reduce the total amount owed. It can be used for any type of debt, including debts owed to the VA.

Debt Settlement

Like civilians, veterans can negotiate their privately-held loans such as credit card debt. This is often done with the help of a reputable debt settlement firm.

But veterans can also settle debts veteran-specific loans, including the following:
  • Chase military credit cards
  • Visa Veteran Tickets credit cards
  • Navy Federal Credit Union credit cards
  • Air Force Federal Credit Union credit cards
  • Credit cards granted by Army credit unions
  • Auto loans for veterans, including those loaned by the United Services Automobile Association (USAA)

To begin the process, you may wish to seek out a settlement firm to help you negotiate your debts. Choose a reputable firm that does not charge excessive fees. The settlement firm will walk you through the process from there and answer any questions that may arise.

A credit counselor from the firm will speak with you about your financial standing and history, and then help set up a game plan. From there, the counselor will instruct you to set aside a certain amount of money each month, in accordance with the plan you’ve agreed upon.

After you’ve reached a set amount of savings, your counselor will contact your creditors to begin negotiations. The goal of this is to convince your creditors to accept less than the full amount you owe and dismiss the remainder of your debt. Once you complete this transaction, creditors consider your debt to be paid, and you do not owe any more money for that debt.

Settling VA Loans

You also have debt settlement options through the Department of Veterans Affairs (VA). If you have a VA debt – because of a home loan guaranty, education loan or accidental overpayment of benefits – you might be eligible for a loan compromise. This is similar to a settlement but does not require the help of an outside firm.

Request a compromise by submitting a letter to the VA that fully explains your offer and why you are requesting a compromise. Be sure to specify the amount of money you’re offering to settle the loan. Along with your letter, you’ll have to submit a Financial Status Report, VA Form 5655. This is used to determine your ability to pay and whether your offer is reasonable.

Fax all the required paperwork to the VA’s Debt Management Center at (612) 970-5688. If you prefer, you can instead mail your paperwork to the following address:

U.S. Department of Veterans Affairs

Debt Management Center

P.O. Box 11930

St. Paul, MN 55111

If your offer is accepted, you’ll typically have 30 days to make the lump sum payment. Do not send any money until you receive notice that the VA has accepted your offer.

Defaulting on VA Debts

When you can’t pay your VA loans, a compromise is one of the best options available. In some cases, you may be eligible for a debt waiver, which similarly forgives all or part of your debt. Another option is to pay in monthly installments, a technique commonly used by those who are ineligible for compromises but cannot meet their payments.

All of these options are better than the alternative of not paying at all. If the VA notices you have an outstanding debt, it will increase the severity of its reaction over time.

The VA will begin collection attempts by sending you a letter and possibly calling you. If you ignore these contact attempts, the VA will add interest and administrative charges to your balance after 30 days. After 60 days, the VA will begin offsetting any VA payments to you such as your military salary, disability compensation or pension. That means a portion of money will be taken from your check and applied to your outstanding debt.

After 180 days, the VA will contact the U.S. Treasury Department about your outstanding debt. The Treasury can garnish more types of payments to you and is not limited to VA benefits. Payments that may be reduced in order to pay your debt include non-military salaries, Social Security payments and IRS tax refunds.

If these benefits do not apply to you, the VA can either hire a collection agency or sue you in a federal court. This could also be the outcome for privately held debts that go unpaid.

No matter what kind of debt you have or how tight your budget is, you have various debt reduction strategies at your disposal, including debt settlement. Take advantage of these options rather than ignoring the problem.

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at

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