Debt Settlement for Veterans

Debt settlement isn’t a shortcut, and it’s certainly not right for everyone. However, it can be a good alternative to bankruptcy, especially for veterans facing severe financial hardship. With that in mind, this guide explains debt settlement for veterans; how it works, when it makes sense, and safer alternatives to try first.

What Is Debt Settlement?

Debt settlement involves professional negotiation with creditors to accept less than you owe as payment in full. The typical timeline takes 24-48 months, but veterans with savings available may be able to get through faster.

Here's how it works: 

1. You demonstrate financial hardship to creditors by stopping payments and letting accounts become delinquent. 
2. Meanwhile, you save money in a dedicated account for 12-24 months. 
3. Once enough is saved, either you or a settlement company negotiates lump-sum payoffs with creditors.

Credit cards, for example, typically settle for 40-60% of the balance, personal loans for 50-70%, and medical bills for 25-50%. 

Example: A $15,000 credit card debt might settle for $6,000-$9,000, saving you $6,000-$9,000. For each dollar you save, however, it’s important to note that credit damage is probable during this process.

When Debt Settlement For Veterans Makes Sense

Especially given the taxation issue, debt settlement isn’t always the right choice. As a general rule, you should consider settlement only if you meet all these criteria: 

Debt Level

If you have at least $15,000 in unsecured debt. Below this threshold, reputable debt settlement firms typically won’t take the case - the numbers simply don’t work for professional negotiation.

Financial Hardship

Debt settlement can make sense when you are experiencing genuine financial hardship, which can mean any of the following: 

• You cannot afford to pay off your debt in a reasonable amount of time using normal payments

• You have a history of making only minimum payments or missing payments entirely

• An ever-increasing percentage of your disposable income is going toward debt

As a note, financial hardship doesn’t mean you’re choosing between food and debt payments. If you’re stuck in a cycle of minimum payments with no realistic path to becoming debt-free, or if debt is consuming more and more of your income each month, you likely qualify.

Payment Capacity

You have the ability to fund settlements over time through a structured payment plan. This doesn’t require having idle cash sitting around - most veterans build settlement funds gradually through monthly contributions.

Bankruptcy Not Desired

Debt settlement can also be an option if you prefer to avoid bankruptcy or it’s not a viable option for your situation.

When to Hold Off on Debt Settlement

There are four primary reasons why a veteran might want to hold off on pursuing debt settlement options: 

Your Debt is Below $15,000

Reputable debt settlement firms won’t work with balances under this threshold. The negotiation process and fees don’t make economic sense for smaller amounts.

You Can Refinance at 6-8% APR and Want To Preserve Credit

If you qualify for low-rate consolidation and maintaining good credit is important to you, refinancing is typically the better path. Settlement will damage your credit score during the process.

Your Monthly Payments Are Comfortably Affordable

If you can manage your current debt payments without significant hardship, there’s no reason to pursue settlement. Continue paying as agreed and avoid the potential damage to your credit. 

You Expect Fast, Easy, Or Guaranteed Outcomes

Debt settlement typically takes 24-48 months and requires patience. Results vary by creditor and situation. If you need immediate relief or expect guaranteed percentages, you’ll be disappointed.

Pros, Cons, And Risks

Pros 

Assuming that you fall into one of the categories of veterans for whom debt settlement makes sense, there are a few meaningful advantages this might bring about: 

• Fastest Path Without Bankruptcy: If you qualify, debt settlement is often the quickest way to resolve debt without filing for bankruptcy.

• Material Debt Reduction: Settlement can significantly reduce what you owe, with credit cards typically settling for 40-60% of the balance, personal loans for 50-70%, and medical bills for 25-50%.

• One Structured Plan: Bringing all your streams of debt under a single payment simplifies your financial life and makes it easier to plan a clear path forward. 

• Professional Support: Having specialists handle negotiations can provide significant mental relief, since you are not facing aggressive lenders alone. 

• VA Benefits Protected: Debt settlement does not affect your VA healthcare or benefit eligibility. Your disability compensation, pension, education benefits, and VA healthcare remain fully intact.

Cons & Risks

All the advantages of debt settlement for veterans above being considered, there are some real trade-offs to be aware of before enrolling: 

• Credit Score Impact: It’s likely that your credit score will decline during the settlement process for several years even following settlement, as settled accounts appear on your credit report as "settled for less than owed.”

• Increased Collection Activity: Stopping payments may mean an increase in the number of collection calls from lenders, although good debt settlement companies may handle creditor communication on your behalf.

• Lawsuit Risk: Though many prefer negotiation to litigation, there is a chance that lenders may choose to sue during the settlement process. Notably, this does not have to mean an end to negotiations.

• Program Completion Challenges: Debt settlement is a marathon, not a sprint. It requires 24-48 months of consistent payments, meaning that veterans should consider whether this is a possibility before enrolling.

• Settlement Fees: Keep in mind that fees are paid on top of your settlements, typically 15-25% of enrolled debt, which are paid once debts are settled.

• Tax Implications: It’s important to remember that forgiven debt over $600 counts as taxable income. Settling $10k for $4k, for example, means that the forgiven $6k becomes taxable, resulting in you owing approximately $1320 to the IRS in the 22% tax bracket. 

Safer Alternatives Veterans Should Try First

Because of the often severe nature of debt settlement for veterans, we recommend looking into the following options before considering settlement:

VA Financial Counseling

VA Financial Counseling offers free budget help and debt payoff strategies with zero credit impact. Call 1-877-222-8387 to access this service.

Nonprofit Credit Counseling

Nonprofit credit counseling and debt management plans negotiate lower interest rates (typically 8-12%) without settlement. You pay 100% of debt but at reduced interest, causing less credit damage. Contact the National Foundation for Credit Counseling at 1-800-388-2227.

SCRA Interest Rate Cap

The Servicemembers Civil Relief Act (SCRA) caps interest at 6% on pre-service debts for active duty service members and those recently separated. This is free—simply contact creditors with copies of military orders.

Direct Creditor Hardship Programs

Direct creditor negotiation through hardship programs often yields lower rates and payment plans without credit damage if you stay current. Many creditors would rather work with you than risk getting nothing.

Debt consolidation loans restructure debt at a lower rate with minimal credit impact when managed properly.

Credit Impact and Long-Term Consequences

An important thing to consider before starting is that debt settlement destroys credit immediately and visibly. To start, expect your credit score to drop 100-150 points or more. This is because each settled account shows as "settled for less than owed" on your credit report, which is a worse mark than paying in full. Keep in mind as well that these notations remain for seven years, and creditors may sue during the settlement process.

The damage creates practical problems for years, affecting a few significant areas:

• You'll struggle to qualify for loans or credit for two to three years minimum. When you do qualify, interest rates will be significantly higher.
• Some employers check credit during hiring, leading to possible employment obstacles.
• Landlords frequently deny apartment applications based on settled debts.

Recovery follows a predictable pattern: 

• Year 1-2: Severe credit damage
• Year 3-4: Gradual improvement if you're rebuilding credit actively
• Year 5-7: Reduction of impact on settled accounts, though they remain visible
• Year 7+: Settled accounts finally fall off your report.

Remember, as well, that these are the expectations to set for yourself when you do everything correctly. Missteps can lead to further issues down the line.

How to Negotiate Settlements 

It’s possible to negotiate for yourself when considering debt settlement, but we highly recommend working with a professional debt settlement company. The following subsections detail how to choose the right company for you as well as what the debt settlement process looks like.

What Good Providers Look Like

When evaluating debt settlement companies, look for these signs of a reputable provider: 

• Time of Payment: Good companies never charge upfront; beware of any company asking for payment before settlement. 
• No Guarantees: Ethical companies won’t promise specific percentages or guaranteed outcomes. 
• Written Fee Disclosures: All fees should be clearly explained in writing before you enroll. Expect ~15%-25% of enrolled debt as a rule of thumb. 
• Clear Collection Guidance:  Good providers explain hows collection activity is handled and provide strategies for managing creditor calls during the process.
• Transparent Credit Impact:  Good companies explain credit consequences upfront, ensuring that you understand the expected score impact before enrolling.
• Professional Accreditation: Look for AFCC (American Fair Credit Council) accreditation for IAPDA (INternational Association of Professional Debt Arbitrators) membership.

The Typical Debt Settlement Process for Veterans

Expect the following stages once you’ve selected your debt settlement company and enrolled in a program: 

1. Assessment: The company reviews your debts, income, and expenses to determine if settlement is viable. 
2. Payment Plan: You begin making monthly deposits into a dedicated settlement account (not to creditors)
3. Account Aging: Accounts become delinquent while settlement funds accumulate (typically 12-24 months)
4. Negotiation: Settlement specialists negotiate with creditors, often achieving 40-60% reductions on credit card debt, 50-70% on personal loans.
5. Settlement Approval: You Approve each settlement before payment is made. 
6. Payment and Resolution: Lump-sum payments are made from your settlement account, and debts are resolved.

Veteran-Specific Considerations

Debt settlement for veterans can be a bit of a different case than typical debt settlement, so keep the following points in mind: 

First, remember that VA disability income is generally protected from creditor garnishment under federal law. That means that even if a creditor sues and wins a judgement, they typically cannot seize your disability compensation. 

Similarly, debt settlement does not impact VA benefit eligibility; your compensation, pension, education benefits, and healthcare remain fully intact throughout and after the settlement process. 

Finally, for veterans in positions requiring security clearances, unresolved debt can be worse than resolved past debt issues. Financial problems raise red flags during clearance reviews, while successfully completing debt settlement demonstrates you’re addressing financial issues responsibly, which may be viewed more favorably than ongoing delinquent accounts.

Frequently Asked Questions

Will debt settlement stop collection calls?

No, at least not immediately. Calls may actually increase as accounts become more delinquent. They only stop once settlements are finalized or accounts are paid.

Can I settle debt while on VA disability income?

Yes, VA disability income can fund settlements. However, this income is generally protected from most creditor garnishment, which may make settlement unnecessary in some cases.

Should I settle debt or file bankruptcy?

Bankruptcy may be better if you owe more than $15,000, have multiple creditor types, face lawsuits, or can't save lump sums. Consult a bankruptcy attorney to compare options.

Can I negotiate settlements on my own without a company?

Absolutely. DIY settlement is possible and saves you 15-25% in fees. It requires persistence and emotional resilience to handle aggressive collection calls.

What if I can't afford the settlement lump sum?

Some creditors accept payment plans on settlements, but most require lump sums. If you cannot save enough, settlement likely isn't viable. Explore bankruptcy or income-driven repayment plans instead.

Will settled accounts ever come off my credit report?

Yes, after seven years from the date of first delinquency, settled accounts automatically fall off your credit report.

Debt settlement is a drastic measure that damages credit for years and creates tax liability. Only consider it after exhausting VA financial counseling, nonprofit credit counseling, SCRA benefits, and direct creditor negotiation. If settlement becomes necessary, negotiate directly when possible to avoid company fees, document everything in writing, and prepare for significant credit consequences.