Debt Consolidation for Veterans & The Military: A Financial Lifeline

Kayra Reven

If you’re a service member, you know that financial worries can be just as daunting as the challenges you face in the line of duty. Balancing personal finances while being deployed, frequent moves, and the risk of missing bill payments can create sleepless nights. But there’s hope. In this article, we’ll explore Debt Consolidation for Veterans & The Military, a financial lifeline that can help you regain control of your finances and peace of mind.

Sr# Headings
1. Military Debt Consolidation Loan (MDCL)
2. Why Use a VA Military Debt Consolidation Loan?
3. Other Military Debt Consolidation Plans
4. Acceptable Closing Costs on VA Loans
5. VA Loan Compromise
6. Defaulting on VA Debts
7. Other Military Debt Relief Options
8. Non-military Debt Relief Options
9. Credit Counseling for Veterans and Military Members
10. Conclusion

1. Military Debt Consolidation Loan (MDCL)

Debt consolidation can be a game-changer for service members facing a financial crisis. If you have a VA loan on your home, you qualify for a Military Debt Consolidation Loan (MDCL), also known as a VA Consolidation Loan. This option allows you to pay off unsecured debts like credit cards, medical bills, and payday loans with one loan, simplifying your monthly payments.

MDCLs are “cash out” loans, meaning you refinance your current loan for more than the amount owed and receive the difference in cash, minus closing costs. While this may seem like you’re taking on more debt, it often comes with lower interest rates and lower closing costs compared to civilian options. These loans can also be spread over 10, 15, or even 30 years.

However, be aware that unsecured debt like credit cards becomes secured debt in this process, using your home as collateral. If you default on your mortgage, you risk losing your home. Lenders will also consider your income and credit score to determine eligibility.

2. Why Use a VA Military Debt Consolidation Loan?

Advantages of VA Military Debt Consolidation Loans

  • Easier qualifying standards compared to conventional consolidation loans.
  • Lower credit score and debt-to-income requirements.
  • Longer repayment terms, up to 30 years.
  • Up to 100% loan-to-value.
  • No monthly mortgage insurance premiums or prepayment penalties.
  • Access to the Department of Defense’s Homeowners Assistance Program (HAP), which provides financial aid to military members.
  • Lower closing costs than regular bank loans.

Disadvantages of VA Military Debt Consolidation Loans

  • Loss of home equity.
  • Risk of foreclosure.
  • Closing costs that can negate the benefits of consolidating debt.

3. Other Military Debt Consolidation Plans

Service members have various avenues for debt relief, depending on their circumstances and the amount they owe. If the problem primarily involves credit card debt, consider refinancing it with a balance transfer card. Many banks and credit card companies offer 0% interest during introductory periods, which can save you a significant amount on interest.

Another option is to consult with a nonprofit credit counseling agency to explore debt management programs. These programs may reduce your interest rates and monthly payments without taking out additional loans.

Additional debt relief options include special forbearance, repayment plans, loan modification, short sales, deeds in lieu of foreclosure, and postponing foreclosure. Additionally, Leave No Veteran Behind (LNVB) is a nonprofit offering education and employment services, including retroactive scholarships to pay off certain student loans.

4. Acceptable Closing Costs on VA Loans

When considering a VA loan, it’s essential to be aware of closing costs. The VA typically guarantees lenders 25% of the home purchase price in case of default, known as VA Loan Entitlement. The VA Funding Fee, applied to every VA loan or refinancing, covers this guarantee. The fee ranges from 1.25% to 3.3%, depending on factors such as prior VA loans and the down payment size. Military reservists may have slightly higher fees, and those with service-related disabilities may be exempt.

Origination fees, which lenders charge for loan processing, are capped at 1% by the VA. These fees are paid at closing and do not become part of your loan. However, lenders cannot charge for other items like escrow, mortgage brokers, underwriting, or processing fees in addition to origination fees.

Other VA loan fees may include appraisal, credit report, discount points, title insurance, real estate broker commissions, recording, and escrow for taxes and insurance.

5. VA Loan Compromise

If you find yourself struggling with VA debt, you might be eligible for a VA Loan Compromise. This process is similar to debt settlement but does not require outside help. You begin by submitting an offer letter to the VA, specifying the amount you can pay and providing a Financial Status Report (VA Form 5655) to demonstrate your ability to pay.

Fax the required paperwork to the VA’s Debt Management Center or mail it to their address. If your offer is accepted, you typically have 30 days to make a lump-sum payment. Remember not to send any money until you receive notice of the VA’s acceptance.

6. Defaulting on VA Debts

Defaulting on VA loans is a situation you want to avoid. When payments are missed, the VA will send letters and may contact you by phone. Ignoring these attempts results in interest and administrative charges being added to your balance after 30 days. After 60 days, the VA will begin offsetting any VA payments to you, such as your military salary, disability compensation, or pension.

After 180 days, the VA will inform the U.S. Treasury Department about your outstanding debt, allowing them to garnish other payments like non-military salaries, Social Security, and IRS tax refunds. In severe cases, collection agencies may be involved, or you could be sued in federal court.

7. Other Military Debt Relief Options

Service members may encounter financial difficulties due to frequent relocations, job challenges for spouses, or limited financial experience. Fortunately, several organizations offer debt relief for military families, including charities and 501(c)(3) organizations. While their funding may be limited, their willingness to help is not.

Some of the organizations worth contacting include the American Legion, Army Emergency Relief, Navy/Marine Corps Relief Society, MilitaryOneSource, Operation First Response, USA Cares, Air Force Aid Society, Coast Guard Mutual Assistance, Disabled American Veterans, and many more.

8. Non-Military Debt Relief Options

If you’re not eligible for VA assistance or prefer non-military options, consider these alternatives:

  • Balance Transfer Credit Cards: These cards offer zero-interest promotional periods, allowing you to transfer debt from other cards and save on interest charges. Ensure you pay off the balance before the promotional period ends.
  • Personal Loans:

Pros and Cons of Different Military Debt Consolidation Plans

Service members have various avenues for debt relief, each with its own set of advantages and disadvantages. Understanding these can help you make an informed decision based on your unique financial situation.

A. Military Debt Consolidation Loan (MDCL)


  • Simplifies multiple debts into a single monthly payment.
  • Lower interest rates and closing costs compared to civilian options.
  • Longer repayment terms, making monthly payments more manageable.
  • Eligibility criteria are often more lenient than conventional loans.


  • Uses your home as collateral, risking foreclosure if you default.
  • Closing costs and potential prepayment penalties.
  • May result in the loss of home equity.

B. Balance Transfer Credit Cards


  • 0% interest during introductory periods can save significantly on interest charges.
  • No need for collateral or home equity.
  • No prepayment penalties.


  • Requires timely repayment during the introductory period; otherwise, high-interest rates may apply.
  • Transfer fees can offset savings if not managed carefully.

C. Debt Management Programs


  • Reduces interest rates and monthly payments without taking out additional loans.
  • Offers a structured plan to get out of debt.


  • May take several years to become debt-free.
  • May impact your credit score.

D. Loan Modification


  • Changes the terms of your loan to avoid foreclosure.
  • Creates a new payment schedule that fits your financial situation.


  • May extend the time it takes to pay off your loan.
  • Could lead to higher overall interest payments.

E. Short Sales and Deeds in Lieu of Foreclosure


  • Allows you to sell the property for less than what is owed on the loan.
  • Avoids the foreclosure process.


  • Impacts your credit score.
  • May not always result in complete debt forgiveness.

F. Forbearance


  • Temporarily suspends mortgage payments, providing time to resolve financial issues.


  • Payments are usually added to the end of the loan, extending the repayment period.
  • You must demonstrate the ability to make payments soon.

G. Repayment Plan


  • Allows you to negotiate with the creditor to resume payments and catch up on missed ones.


  • Requires additional monthly payments on top of regular obligations.
  • Missed payments may lead to foreclosure.

These pros and cons should help you assess which debt consolidation option aligns best with your financial goals and needs. Always consult with a financial advisor or counselor to make an informed decision.

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