Special Credit Protections for Military Personnel

Given that our men and women in uniform so often find themselves in harm’s way these days, it is only fitting the law provides special protections to them with respect to the credit obligations they enter into prior to being called into active duty. The original law, the Soldiers and Sailors Civil Relief Act, has been around since 1940. It was updated and renamed (now called the Servicemembers Civil Relief Act (SCRA)) in 2003 to reflect the realities of modern-day military service. Lets review some of the highlights.

When financing a man or woman in uniform, the SCRA caps the interest charged on obligations at 6 percent per year. Specifically, an interest rate of more than 6 percent on an obligation incurred by a servicemember before entering active duty must be reduced to a rate of 6 percent or less per year during the period of active duty.

Fortunately, you don’t need to monitor your customer’s military service to know whether or not you must reduce the rate. Rather, the servicemember is required to provide you with a written notice and a copy of the orders calling him or her into service.

There was some uncertainty as to whether the 6-percent interest-rate cap required you to forgive the excess interest or merely defer such interest until the servicemember returns from active duty. The SCRA clearly states that interest in excess of 6 percent must be forgiven during the period of military service.

Keep in mind the written notice and orders that trigger the interest-rate cap do not need to be provided to you until 180 days after the servicemember’s termination or release from active duty. This could lead to a situation where you have to refund all the interest paid before you received the notice and orders.

The act also makes default judgment more difficult to obtain. Under the SCRA, a court is not permitted to enter a default judgment against a servicemember without first notifying him or her of the lawsuit, and without first appointing an attorney to represent his or her interests. The court is also required to grant a minimum 90-day stay of proceedings if the servicemember’s appointed counsel requests such a stay. To obtain a stay of proceedings, the appointed counsel only needs to allege that a defense cannot be presented without the servicemember’s presence, or that appointed counsel has been unable to contact the servicemember to determine whether there is a meritorious defense to the claim. It’s a fairly low bar.

A required stay may be longer than 90 days depending upon the servicemember’s circumstances. Because of that, the new law allows courts to stay proceedings seeking default judgments against servicemembers during their period of active duty.

A servicemember may seek a court’s order to vacate a default judgment if it was entered during the period of military service or within 60 days of the termination of the period of military service. However, the servicemember’s application to the court for an order vacating a default judgment must still be received within 90 days after the date of termination of or release from military service.

The SCRA also addresses leasing. It allows servicemembers to terminate a lease when they enter military service, or when they receive orders for a permanent change of duty station outside the United States for a period of 180 days or more.

The act also says that if a servicemember paid a deposit or an installment on a contract for the lease or purchase of personal property before entering active duty, the contract can’t be terminated and the vehicle can’t be repossessed if the servicemember fails to make a payment before or during the period of active duty. The only way the vehicle can be repossessed is if the creditor obtains court approval.

The purpose of the SCRA is to allow servicemembers to devote their full energies to the nation’s defense needs. It does so by providing extraordinary protections to servicemembers from creditors, personal property lessors and landlords. In order to avoid violating the provisions of the new law and incurring significant penalties for such violations, be sure you know what to do when you receive notice and orders from a military customer.

Michael Benoit is a partner in the Washington, D.C., office of HudsonCook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. He can be reached at 202-327-9705 or by e-mail at [email protected]. Nothing in this article is intended to be legal advice and should not be taken as such. All legal questions should be addressed to competent counsel.