The Servicemember’s Civil Relief Act (SCRA) provides many protections for today’s military members. It allows for servicemembers to receive stays of proceedings in civil matters, gives tax relief to military families, and allows servicemembers to break leases due to PCS or deployment orders. In addition, one of the most important provisions allows servicemembers to reduce the interest rate on pre-service obligations to 6 percent.
In order to be eligible to reduce the interest rate on an obligation, a servicemember must: (1) have incurred the debt prior to accessing onto active duty; (2) send written notice to the creditor along with a copy of military orders; and (3) be able to make a showing that service in the armed forces materially affects their ability to pay. The most common example is a reservist who makes a substantial amount of money in the civilian world and has a home mortgage with a seven percent interest rate. The reservist is called to active duty and now makes much less than at his/her civilian job. Therefore, the ability of reservist to pay has been materially affected by being called to active duty, and he/she may have his/her interest rate reduced.
Often the determining factor of whether or not the SCRA will apply is the showing that a servicemember’s entry onto active duty materially affects his/her ability to pay. The burden of proof is on the creditor to show that the military service does not frustrate the ability to pay. However, it is in the servicemember’s best interest to include in the letter to the creditor an explanation as to why military service will have a negative impact. While many reserve component personnel can easily make this showing, many servicemembers do not actually meet the criteria. The financial status of officers who have recently graduated college or junior enlisted directly out of high school is often enhanced by joining the service and therefore, the protections would not apply.
The 6 percent cap applies not only to obligations held solely by the servicemember, but to liabilities incurred by the servicemember and their spouse jointly. Therefore, the reservist called to active duty, whose spouse’s name appears on the mortgage as well, can still have the interest rate reduced in accordance with the SCRA. This provision mirrors the lease protection provision of the SCRA which allows a spouse whose name is on a lease to break the lease as well when their servicemember spouse receives PCS or deployment orders.
The most important aspect of the benefit of the 6 percent interest rate is that it only applies to loans which existed prior to a servicemember’s entry onto active duty. If a servicemember incurs a debt following entry onto active duty, whatever interest rate the servicemember contracts for will govern. In addition, if a servicemember has a revolving credit account the rates that the account is set up for will be what applies.
Servicemembers having questions about whether they qualify for the 6 percent interest rate cap should contact their local legal assistance office.