Trading monthly VA checks for a lump
sum is a bad deal
of trading in your Department of Veterans Affairs disability checks
for a lump sum payment? The U.S. government and the nation's two
top veterans groups suggest you reconsider. For cash-strapped vets,
they say, the offer of a lump sum now vs. more money later is no
"As a general policy, we don't think getting
40 cents on the dollar is a good deal," said Thomas Pamperin, assistant
director of compensation and pension service for the Department
of Veterans Affairs, formerly known as the Veterans Administration.
The idea of trading military disability payments
for a lump sum of money has been around since the Civil War, said
Phil Budahn, a VA senior spokesman.
But last spring, department officials heard
that the concept had re-emerged with a millennial twist. Lenders
are using the Internet to reach out to vets -- promising to solve
their money problems in exchange for their disability payments.
How it works
This is how the deal works, according to the VA, veterans groups
and several companies making the loans: In exchange for a lump sum
payment, the vet signs a contract agreeing to hand over a sum equal
to his or her monthly payments for a designated number of years.
Because payments would stop if the vet died,
the companies also require the vet to have or purchase a life insurance
Federal law is very clear that VA disability
payments are not to be reassigned to a third party. Even most creditors
are barred from attaching VA disability payments. The only exceptions
are the federal government, child support and alimony, according
to officials with the VA.
However, vets can contract for a loan where
the monthly payment just happens to equal their VA disability check.
One company, Retired Military Financial Services,
based in Los Angeles, makes an automatic deduction from
the vet's account on a pre-arranged day, said company founder Ron
Another company, Trans World Funding LLC, a
Web-based firm located in Baltimore, asks the vet to open a joint
bank account with the company, according to Marc L. Lev, the company
president. The government deposits the pension payments, and Trans
World withdraws its money each month.
Both companies write the contracts for eight
So what's wrong with the deal? Plenty, according
to veterans groups.
"It seems to me that veterans appear to be giving
up an extremely high benefit, to which they are entitled, for immediate
cash," Pamperin said.
He worries that, despite claims to the contrary,
risk assessment for the loans might not be as stringent as with
traditional lenders like banks and credit unions -- meaning that
vets could be signing up for debts they can't afford to carry.
Companies buying the pensions insist they are
providing a needed service -- and dealing with customers whom banks
would not help.
"There is no place in this country where a fellow
or a woman who is qualified can walk in and get $20,000 unless they
put up their house," said Steinberg, who said he started RMFS six
years ago. "All of the banks have become hard-money lenders."
While the process seems to fit the classic definition
of a loan -- money or goods now in exchange for more money later
-- Lev and Steinberg insist that the transactions are not loans,
"This is not a loan, this is a business arrangement,"
The difference, both men said, is that their
contracts require no collateral. If vets default, the collection
process works much the same as with credit card debt.
But both men invoke the concept of bank loans
when asked to explain why the companies keep such a large share
of the disability pension payments. Lev said that his 5-year-old
company -- which he claims makes thousands of such contracts on
VA disability pensions every year -- pays an average of 40 cents
on the dollar.
Steinberg, who claims that his California-based
company writes "fewer than 10" of the contracts each year, said
that he pays from 38 to 45 cents on the dollar.
"The question is, 'What becomes a reasonable
number?'" said Steinberg. "We take advantage of nobody." With more
than 2.4 million disabled vets, there is a large pool of loan candidates.
Disabled veterans draw a monthly stipend from the VA, the amount
determined by the extent of their injuries. The largest segment
draws from $194 to $427 a month for injuries that comprise a 20
percent to 40 percent impairment, Budahn said.
Both Steinberg and Lev are adamant that applicants
have a good credit rating and another source of income besides the
VA disability pension.
But to be eligible, vets must have a pension
of at least $400 a month for RMFS and a minimum of $500 a month
for Trans World Funding, which means vets have significant disabilities.
Lev reports that most of his clients are "highly disabled" with
70 percent to 80 percent impairments.
Contracts and consequences
At present, the VA is working to discourage VA disability pension
loan contracts. The office has issued several warnings.
Officials there, and at the American Legion
and the VFW, said that while they have had no complaints from vets
over the contracts, they are afraid disabled vets could be tempted
into giving away years of a steady income stream without considering
all the consequences.
Recently, U.S. Rep. E. Clay Shaw Jr. (R-Fla.)
has spoken out against the practice of buying VA disability pensions.
Shaw, who has asked a congressional committee to investigate the
practice, is thinking of introducing a measure mandating a significant
tax on the profits companies recoup from such contracts, according
to his chief-of-staff, Clint Tarkoe.
Canadian officials were recently faced with
a similar dilemma. After hearing that Trans World Funding was considering
moving into Canada, the Department of National Defence and Veterans
Affairs Canada issued press statements and sent notices to every
pensioner alerting them to the practice, according to the March/April
issue of Legion Magazine, a Canadian veterans publication.
But Canadian officials also offered alternatives
to cash-strapped vets, including government sources for emergency
While Lev hasn't ruled out taking his business
into Canada, he says requests for information from there have dried
Money -- now or later?
Whether it's lottery winnings or legal settlements, there have always
been non-traditional lenders willing to offer a cash payout in exchange
for taking over long-term payments. So what's wrong with trading
more money later for some cash right now?
The concept of some money now instead of more
money later is the opposite of investing -- and investing is where
the real money is made.
Recently, a vet e-mailed Bankrate.com asking
about a company that was prepared to trade eight years of his $500-a-month
disability payments in exchange for a little more than $19,000.
It's no wonder the company was willing to make
the deal. Collectively, the veteran's payments would total $48,000,
more than two and a half times the initial investment.
Government officials and veterans groups worry
that the big danger is that vets who are already financially strapped
with medical bills or family obligations could be digging themselves
a bigger trench to climb out of -- and giving away an income source
they really need.
Instead of swapping the payments for cash, Jim
Fischl, director of veterans affairs and rehabilitation for the
Legion, the country's largest veterans group, recommends trying
the more traditional route -- banks and credit unions -- while cutting
spending to a minimum.
In addition, vets have access to special home
loans and education loans through the GI Bill. And disabled vets
are entitled to free medical for their service-related injuries.
There is also a needs-based pension program for disabled vets, said
Bottom line, said Fischl, "If you have trouble
managing your money, this isn't the solution."
Dana Dratch is a freelance writer
based in Atlanta.
-- Posted: Sept. 11, 2001