Law eases debt burden for active military

Servicemembers' Civil Relief Act caps interest rates at 6 percent

By Steve Holt

Americans' personal debt reached $2.6 trillion earlier this year, and the men and women of the nation's armed forces have felt their share of financial pain. However, a nearly 70-year-old law is helping to ease the debt burden for those called to actively serve their country.

Financial protections for service members exist in the form of the Servicemembers' Civil Relief Act (SCRA). Under the law, called the Soldiers and Sailors Civil Relief Act when it was written in 1940 until it was renamed and updated in 2003, lenders must cap at 6 percent the interest rates on loans military service members incurred prior to becoming active.

The 6 percent interest cap applies to any charges -- including credit card debt, service charges and renewal charges or fees -- except bona fide insurance. The act specifies that in order to receive the interest rate reduction, a service member must request it in writing and include a copy of his or her military orders. Additional protections include:

• Reduced interest rates on mortgage payments.
• Protection from eviction if your rent is $1,200 or less.
• Delay of all civil court actions, such as bankruptcy, foreclosure or divorce proceedings.
• The promise that service members who claim any of the law's protections would not feel adverse effects on their credit reports or be refused future credit because of it. (This protection was added during the 2003 revision of the law.)

Some credit card companies even go beyond what the law requires and offer additional benefits to service members. However, many lenders simply ignore its requirements, says Cari Auclair, who runs the American Military Debt Management Services, a service unaffiliated with the military but that counsels and advises members of the military who are struggling with debt. There are criminal penalties in many sections of the SCRA for violations of the act. Additionally, many sections preserve servicemembers' basic right to bring lawsuits to protect additional legal rights independent of the SCRA.  

Numbers show that U.S. military men and women can use the help, even though there is some dispute regarding the extent of their debt difficulties. A 2006 Associated Press review of records from the Navy, Marines and Air Force revealed a staggering increase in the number of soldiers who had their clearances to be deployed around the world revoked as a result of personal debt. The AP found that among the branches that provided information, the number of clearances revoked because of debt climbed from 284 in 2002 to 2,654 in 2005 -- a 935 percent spike.

On the other hand, surveys conducted between 2002 and April 2007 by the Defense Manpower Data Center (DMDC) and the Department of Defense reveal quite the opposite.

"Data show a downward trend in active-duty service members reporting difficulty maintaining their finances," says Defense Department spokeswoman Eileen M. Lainez. "Information on financial health gathered at that time shows that the vast majority of military members were not reporting financial difficulty paying their rent or mortgage. Over the past three years, more service members have reported saving for their future."

Air Force Staff Sgt. Brandon Jacobson also denies that personal debt is any bigger a problem in the military than in the civilian world. He runs a financial blog called Money for Military and points out that servicemen and women even have some extra advantages that can help them steer clear of debt.

 "The military is actually provided more protections: free education, financial assistance that civilian companies would love to charge for, the service members' Civil Relief Act, and lending protection," says Jacobson, currently stationed at Beale Air Force Base outside Sacramento, Calif. "I wouldn't say we're any more susceptible to being in debt than civilians."

However, Jacobson did recently help a friend on base claim the act's interest rate reduction. When the friend approached Jacobson for some financial advice regarding her mounting personal debt, Jacobson noticed that the majority of her debt -- including credit card debt and car payments compounding at 16 percent interest -- had accrued before she joined the Air Force.

"Four of the credit card companies dropped the interest rate down to 6 percent right away," says Jacobson. "On the car loan, she faxed them her military orders, and they dropped it to 6 percent right away. That's a better rate than I had on my first car."

The interest cap provision also targets the common practice of payday lending, which has been shown to prey upon service members with the promise of a same-day cash loan in exchange for any form of identification and a post-dated check.  The catch: sky-high annual interest rates that can exceed 400 percent.

And in a time when home foreclosures in the military outnumber those in the civilian world four-to-one, the SCRA provides the same 6 percent cap to pre-service mortgages and prevents foreclosure while a service member is on active duty.

This is serious business to the armed forces. As a rule, the military views personal debt as a risk to both individual service members and the interests of the armed forces overseas, as the stress of soldiers' financial battles back home may distract them from their primary mission or -- even worse - tempt them to sell secrets to our enemies.

American Military Debt Management Services' Auclair points to what she views as low pay in the military, the difficulty for spouses seeking new jobs when a service member is transferred, and the rising cost of living as contributing to the problem of military personnel's increased debt load.

"It's a mess," says Auclair. "I've had clients over in Hawaii who can't even afford to turn their cable on because of the cost of living over there, and the stipend that the government gives doesn't cover what the actual cost of living is in an area that is overinflated."

Auclair also dispels the myth that the victims of military debt are primarily the younger, lower-ranked soldiers who are seeing a steady income for the first time in their lives.

"After looking at this industry over the last 10 years, I think that the majority of our clients are not the younger soldiers," she says. "They are the mid-level officers -- generally not second lieutenants, usually first lieutenants and up. The reason being, they've had time now to establish a family and the increases that they're supposed to get paid don't cover the family costs, and they've had time to rack up the debt."

"Very rarely do we get a younger service member who's just gone hog wild."

To get more details on the act, and to begin the process of applying for relief, visit the military's Civil Relief Act Web site, run by the Defense Manpower Data Center.

See related: Card issuers that go beyond what the law requires

Published: July 25, 2008

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