Credit, Bankruptcy, and Taxes

This section contains information for veterans and caregivers and their families who have questions about the law and how it applies to certain financial situations. In particular, this section might be useful to those currently facing financial difficulties. This section will help you deal with debt collectors, student loans, and filing for bankruptcy. It also provides helpful information for veterans dealing with tax issues. Note: Additional tax issues are addressed in the section on the Servicemembers Civil Relief Act (SCRA).

When dealing with financial matters on behalf of someone else, such as your veteran, you might need a power of attorney. See the section on powers of attorney for detailed information on the kinds of powers of attorney that may be useful in these financial situations.

For more complex legal situations consult Lawyers for Heroes your next step pro bono legal resource for veterans and their families.

The Fair Debt Collection Practices Act (FDCPA) regulates the behavior of debt collectors. The FDCPA does not regulate all instances where you owe money. It applies only to debt collectors, which means a company or person, other than the original creditor (person/agency from whom money was borrowed), that collects debts on behalf of others. Most commonly this means a collection agency. The FDCPA does not cover creditors like a bank that gives you a loan or credit card companies (your state law may have protections for you that extend to these creditors).

Under the FDCPA, a debt collector may contact you by mail, in person, or by phone during convenient hours. Unless you agree in writing (or a court specifically grants permission), a collector may not contact you at inconvenient or unusual times or places. Examples of unreasonable or impermissible times are before 8 a.m. or after 9 p.m. Also, a debt collector may not contact you at work if the collector knows or has reason to know your employer forbids collectors from contacting employees at the work place. If the collector knows a lawyer represents you, he or she must contact your lawyer and cannot directly contact you.

The FDCPA does allow a collector to contact any person in order to locate you. However, in doing so, the collector usually may not talk to anyone more than once or refer to the debt when talking to that person. Collectors also are prohibited from using threats of violence or harm, obscene or profane language, or repeatedly using the phone to annoy you.

If a debt collector is violating the FDCPA, consider writing a complaint to your state attorney general’s office (find your state attorney general) and the nearest office of the Federal Trade Commission (FTC). You also may file a complaint with the FTC online. The FTC actively pursues violators and may fine them heavily or even put them out of business. You also might be able to sue the creditor in state or federal court. However, you must do so within one year of the date on which they violated the law. You may recover money for the actual damage you suffered; in addition, the court may award you up to $1,000 for each violation, and you may recover court costs and lawyer’s fees. These cases can be complicated, so consider working with an attorney to see what avenue is best for your case. The American Bar Association’s Directory of Programs lists local organizations that might provide you with free or low-cost legal help. Also, when you click on your state in the directory, at the top of your state’s page might be a link to state-specific resources on the topic of debt collection that can inform you of additional rights under your state’s law.

The National Consumer Law Center has additional resources on debt collection that might be helpful to you, such as how to deal with debt collection harassment and what to look for if you are trying to get help to resolve your debts.

You might have certain rights available to you under the Servicemembers Civil Relief Act (SCRA) that might have bearing on any debt problems. Review the section on the SCRA to ensure you were taking advantage of — and receiving — the full benefits to which you were entitled while your veteran was on active duty.

The Higher Education Opportunity Act permits eligible, disabled veterans to have the entire outstanding balance of their Title IV student loans and/or TEACH Grant service obligations permanently forgiven. A disabled veteran is eligible when the VA determines he or she has a service-connected disability (or service-connected disabilities) that is (are) 100-percent disabling or is totally disabled based on an individual unemployability determination.

If you are eligible, you must apply to the loan holder (i.e., the current owner of the loan) for a total and permanent disability discharge to forgive your loans. For Perkins loans, the loan holder is the Perkins school lender. For Federal Family Education Loans (FFEL), the loan holder is the lender or, if a default claim has been paid on the loan, the guaranty agency. For FFEL or Perkins loans that have been assigned to the Department of Education, the department is the loan holder.

It is important the VA has determined your disability to be 100-percent permanent rather than 100-percent temporary. The VA might consider you 100-percent disabled and unemployable currently, but your condition might improve in the future; this is considered temporary. For example, certain types of cancers from which you have a good likelihood of recovery or some mental health issues can be considered temporary. If you are uncertain whether your disability is temporary or permanent, refer to your VA award letter. If it states something similar to “no future medical exams are scheduled,” that would indicate the VA believes your condition will not improve and it is considered permanent. But if the letter refers to possible future exams (or says nothing about exams at all), it might indicate your disability is considered temporary. If you still are unsure, contact your VA regional office for guidance.

To apply, if you have received a VA disability determination specified above, you must complete only Sections 1 and 3 of the Discharge Application: Total and Permanent Disability (TPD application) and submit the application to the loan holder. You are not required to have a physician complete Section 4 of the TPD application. Instead, with your application, you are required to submit documentation from the VA showing you have received a determination of individual unemployability or you have been determined to be 100-percent disabled because of one or more service-connected disabilities. You may satisfy this requirement by submitting a copy of your VA rating decision or a letter from the VA confirming you have received one of the qualifying ratings. After receiving the TPD application, the loan holder must suspend collection activity on the loan.

If you qualify after submitting the TPD application, you will receive immediate forgiveness of your loans and will not be subject to the three-year post-forgiveness monitoring period. Your loan holder also must refund any payments received after the effective date of the grant of disability.

If you are totally and permanently disabled, but you are not eligible because your disabilities are not service-connected, you still might be able to obtain forgiveness of your student loans through the standard TPD forgiveness process. To apply for a total and permanent disability discharge under the standard process, you must have a physician complete the physician’s certification section of the TPD and submit the completed application to the loan holder.

Visit the Department of Education website for more information on this type of loan forgiveness.

Before resorting to bankruptcy, explore alternatives for taking care of debts you cannot pay. For example, a creditor might be willing to settle its claim in exchange for a partial cash payment, or it might be willing to stretch out the term of its loan and reduce the size of the payments you owe each month, allowing you to pay off your debt by making smaller payments over a longer period of time. If you go this route, however, this may result in you paying your creditor more money in the long run. You also might want to consider working with a credit counselor that can help you negotiate with your creditors and reduce your debt to a more manageable level. A word of caution: Not every credit-counseling organization has trustworthy motives. The National Consumer Law Center has helpful guidance on what to look for in these companies.

Bankruptcy is a legal process through which people and businesses can seek a fresh financial start when they are in such financial difficulty they cannot repay their debts. When a person files bankruptcy, a court eliminates all or a portion of that person’s or business’s existing debts or stretches out the monthly payments on those debts under the court’s protections and supervisions.

The major disadvantage of filing for bankruptcy is a record of the filing remains on your credit report for as long as 10 years. Filing for bankruptcy will make it more difficult or more expensive for you to obtain credit while it remains on your credit report. However, many consumers who file for bankruptcy are able to receive credit within a year or two of filing. Note: Terms of the new credit might be affected by the fact that a bankruptcy filing has occurred. For example, you might only be able to get a credit card with a 20- or 25-percent interest rate after filing when you might have been able to get one with a 14-percent rate before filing.

There are several types of bankruptcy, but for individual consumers, there are really only two common types: Chapter 7 and Chapter 13. Chapter 7 (straight bankruptcy) involves the debtor (person who owes money) surrendering most of his or her nonexempt assets. A bankruptcy trustee will be appointed to distribute the assets to the creditors directly or to liquidate (sell) them. Assets exempt from these sales and liquidation vary significantly. Chapter 13 (wage-earner bankruptcy) requires the debtor to propose a repayment plan for repaying all or a portion of his or her debt in installments from his or her future income. Chapter 13 plans can last from three to five years, depending on the input of the creditors and other factors.

Under either type, once the bankruptcy case ends, most borrowers are discharged from — that is, no longer are held liable for — most of the debts they incurred before filing. In other words, the court excuses such borrowers from having to repay most debts. The borrowers then start over again with substantially clean financial slates, except a record of the bankruptcies will generally remain on their credit records for up to 10 years.

A bankruptcy is a highly structured procedure under the jurisdiction of the federal bankruptcy courts; do not attempt to file bankruptcy without the aid of an attorney. Bankruptcy lawyers often will charge a set, or flat, fee to file a Chapter 7, and it might be possible to repay at least part of the attorney’s fee over time as a part of a Chapter 13 payment plan. Visit the American Bar Association’s Directory of Programs for organizations in your area that might provide free or low-cost bankruptcy assistance.

For more information about bankruptcy, the National Consumer Law Center has several publications on this topic, including an overview of bankruptcy, your legal rights during and after bankruptcy, and how to use credit wisely after bankruptcy.

You should not be taxed on the cost of the house, so long as the home was provided by a nonprofit organization that includes people like your veteran within the charitable class of people it serves. You should appeal the Internal Revenue Service’s determination with the assistance of legal counsel. Visit the nationwide page on the American Bar Association’s Directory of Programs for information about an organization that will help veterans with tax problems.