A recent Tampa Free Press opinion piece urged financially strained active‑military personnel to explore for‑profit debt settlement as a remedy for their money woes. Yet, just like the industry’s sales pitches, the article glosses over the serious financial and professional risks that servicemembers may encounter when they follow those tactics.
For‑profit debt settlement firms typically tell clients to halt payments to creditors and funnel money into a firm‑controlled account while they negotiate a debt reduction. The catch? Clients’ accounts become delinquent, and creditors may sue. A Harvard Kennedy School study revealed that the average settlement takes more than 14 months, and one in four clients sees no settlement after three years.
For active‑military personnel, the fallout can be catastrophic. Federal security‑clearance guidelines flag a history of unmet financial obligations as a security concern. A standard Department of War review will highlight personnel with heavily delinquent or defaulted credit accounts, and under the Uniform Code of Military Justice, failing to pay a debt can be a punishable offense.
In short, servicemembers who adopt a for‑profit debt‑settlement strategy risk jeopardizing their careers. In July, the Federal Trade Commission warned servicemembers and veterans that debt‑relief scams can threaten a security clearance.
The financial damage is equally alarming. TransUnion found that consumers who were current on their bills but used for‑profit debt‑relief services saw their median credit score tumble by 96 points within six months, with bankruptcy filers losing an additional 20 points. For military personnel, the delinquencies created by debt‑settlement firms trigger the very Pentagon clearance flags they must avoid.
Since 2006, the Military Lending Act has capped the cost of covered credit for active‑duty servicemembers and their families. The Servicemembers Civil Relief Act further allows interest rates on pre‑service debts to drop to six percent. Congress has also limited what creditors may charge military households. However, there is no federal cap on what a debt‑settlement firm can levy, and fees typically range from 15 % to 25 % of the enrolled debt.
But what if servicemembers can’t repay their balances? Several alternatives exist beyond for‑profit debt settlement. Creditors sometimes settle directly with customers in genuine hardship without charging a fee. Nonprofit agencies offer settlement plans that begin with counseling and collect fees only after creditors are paid. For example, a nonprofit that settles $40,000 of debt over three years would charge roughly $3,000 in fees, versus the $12,000+ a for‑profit firm would pocket.
Servicemembers actually enjoy more options than civilians. Large military bases provide free financial counselors, and military relief societies offer interest‑free loans and grants. Crucially, security‑clearance guidelines do not penalize personnel for seeking legitimate nonprofit financial counseling.
The men and women serving in the armed forces,and their families,should not be sidetracked by financial strain or insecurity. They need to explore every available option while fully understanding the associated costs and risks. For‑profit debt settlement can work only if the firm is transparent about its business model and tactics. Keeping the financial and career consequences of credit default hidden from servicemembers exposes them to unnecessary and serious financial and professional danger.
Ed McFadden serves as senior vice president for communications at the American Financial Services Association, the nation’s oldest and largest trade group representing the consumer credit industry.
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