Independence Day turns the thoughts of many Americans to patriotism and the military troops that serve us. That makes it the perfect time to look beyond the uniforms and politics to the day-to-day reality of U.S. servicemembers, veterans and their families. I don’t mean the danger soldiers face when deployed, or the difficulty of being separated from family, but a much more mundane and pervasive issue: unmanageable debt.
Military Servicemembers and Debt
According to a survey conducted by American Consumer Credit Counseling, members of the military and their spouses revealed that household expenses exceeded income for about 7%, and were roughly equal to income for 31%. In addition, 52% of enlisted personnel and 32% of officers surveyed reported having no savings.
There’s no question that we’re living in difficult economic times, but the study suggests that our servicemembers and their families are worse off than the average American in many ways. For example:
- They are less likely than civilians to own homes, and more likely to be carrying a mortgage if they do own their homes
- With regard to credit cards, military members are more likely to:
- Have credit cards
- Have four or more credit cards
- Have high credit card balances; and
- Carry a balance from month to month
Further, 11% of junior enlisted members have bounced at least one check in the past year, and 12% have had their telephone, cable or Internet services disconnected.
In a more extensive survey conducted by Defense Manpower Data Center (DMDC) in 2013, 39% of active duty servicemembers reported having been short of cash between paychecks in the prior year, and 10% said they’d been unable to pay monthly bills.
The Origins of Military Debt
Servicemembers fall into debt for many reasons. One factor for many is the pay structure, which includes a low level of monetary compensation each month, allowing for little flexibility without taking on debt. Unlike many Americans with relatively low wages, members of the military form an attractive market for the consumer credit industry, since their pay is regular and servicemembers have a more powerful incentive than many civilians for keeping their bills up to date. Department of Defense Instruction 1344.09 reads in part:
Members of the Military Services are expected to pay their just financial obligations in a proper and timely manner. A Servicemember’s failure to pay a just financial obligation may result in disciplinary action under the Uniform Code of Military Justice (Reference (g)) or a claim pursuant to Article 139 of Reference (g).
Because of the high expectations set for servicemembers, military personnel are often hesitant to seek assistance with financial problems, becoming caught up in a cycle of short-term “solutions” that may only exacerbate the problem. Those with security clearance are particularly vulnerable to this trap, since financial instability can lead to denial or revocation of security clearance.
49% of active duty servicemembers who responded the DMDC survey referenced above said they considered it likely or very likely that their commanding officers would be informed if they requested assistance from the military aid society. 31% believed the request would be likely or very likely to result in loss of security clearance. These concerns may make members of the military more vulnerable to predatory lenders.
When members of our military are performing key functions and operating in sensitive areas of the world, it’s critical that they’re able to remain focused. Outside stressors can be dangerous not just for the servicemember, but for the many who rely on him or her. Those concerns are real enough that the federal government has passed legislation and adopted regulations that attempt to buffer financial pressures for active servicemembers.
Unfortunately, many in the credit and debt collection industry appear to consider those issues secondary to maximizing profits. In 2015, the Consumer Financial Protection Bureau (CFPB) received more than 19,000 complaints from members of the military, veterans and their spouses. 46% of those complaints were related to debt collection activities, including:
- threatening to contact servicemembers’ commanding officers regarding unpaid debt;
- disclosing servicemembers’ debts to commanding officers; and
- characterizing delinquencies as military violations that would subject the servicemembers to discipline.
From 2014 to 2015, complaints from the military community increased in every category.
Protections for Servicemembers
Last year, the Department of Defense (DoD) updated regulations under the Military Lending Act. Provisions that take effect in October of this year will prohibit all rollovers, renewals and reissues of payday loans to members of the U.S. military. The 36% interest rate on loans to active military is extended to cover more types of credit, and to include certain fees. Credit card issuers, however, will not be required to comply with the new regulations until October, 2017.
In addition, the Servicemembers Civil Relief Act (SCRA) prohibits creditors from charging more than 6% interest to active duty members of the military, provided that debts were incurred prior to activation and the service materially affects the servicemember’s ability to pay. The SCRA also offers protection against eviction.
Both the Foreclosure Protection Act and the Military Homes Protection Act offer some protection for homeowners facing eviction or seeking refinancing or modification.
Solutions for Servicemembers Struggling with Debt
Lower Interest Rates with the SCRA
The first, simplest and perhaps most underutilized tools for active duty military personnel is taking advantage of the protections of the SCRA—particularly the 6% interest rate cap that is available to many. For the most part, SCRA protections must be initiated by the servicemember, who must make a request and provide documentation of his or her enlistment status.
Whether the protections are underutilized because servicemembers are not aware of them, don’t believe that they qualify or simply choose not to partake for some reason, the bottom line is clear: a large number of servicemembers are paying much higher interest rates than necessary.
A report issued by the Government Accountability Office (GAO) in 2014 revealed that 32% of eligible servicemembers had loans carrying interest rates above 6%, and that 82% of those with mortgages were paying higher rates than required. According to the GAO report, one financial institution’s data showed that only 31% of eligible servicemembers had submitted the documentation necessary to lower their interest rates.
While lowering interest rates may not sound like significant relief to a person struggling to keep financial obligations current, interest rates have a significant impact on the amount of money actually paid out. Depending upon the type of debt, a lower interest rate may mean lower monthly payments, a shorter time for payoff, or both.
Consult with the Military Aid Society for Your Branch of the Service
Servicemembers who are facing short-term crisis situations may qualify for a grant or loan to bridge the gap. Although each situation is treated on a case-by-case basis, these are typically short-term loans that might address the same sorts of unexpected expenses or one-time shortfalls as a payday loan, but with more flexibility in the amount and repayment schedule and entirely interest-free.
Bankruptcy isn’t the right option for every servicemember struggling with debt, any more than it is the right solution for every civilian. However, many military debtors avoid bankruptcy or believe that it is not an option for them because of the financial responsibility expectations set forth by the armed services. In fact, although there are valid concerns with regard to security clearance, servicemembers enjoy some extra protections in bankruptcy.
Servicemembers with unmanageable debt should seriously consider discussing the ramifications of bankruptcy with commanding officers. Although it is possible that bankruptcy could impact security clearance, it is also possible that large or numerous delinquent debts would create a greater risk to clearance, since a servicemember in dire financial straits may be considered more vulnerable to external pressure or financial incentives.
There’s no one-size-fits-all solution for the debt problem facing many members of the U.S. military. One consistent theme, however, is that servicemembers don’t avail themselves of all of the assistance available.
Avoidance is a common response to debt problems, but not an effective one. If you’re in the military and stretched too thin financially, stressed by debt, concerned about your security clearance or other professional ramifications of debt or distracted by the need to support your family while giving your all to your service, you can’t afford to get stuck there. Gather the information you need, consult with your superiors and/or experts in military debt management, and then take decisive action.