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Trading monthly VA checks for a lump sum is a bad deal

Trading VA checksThinking 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 bargain.

"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.

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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 policy.

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 Steinberg.

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 years.

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, but contracts.

"This is not a loan, this is a business arrangement," said Lev.

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 money.

While Lev hasn't ruled out taking his business into Canada, he says requests for information from there have dried up.

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 American 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 Pamperin.

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

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