A publication of Vietnam Veterans of America, Inc. ®
An organization chartered by the U.S. Congress
August 2001/September 2001
Veterans Benefits Update
Beware of VA Benefits Scam
By Leonard J. Selfon, Director, Veterans Benefits Program
Earlier this year, we warned VVA members about a financial scam that offers an instant, one-time, lump-sum payment in exchange for future monthly VA disability compensation or pension checks. Federal law prohibits veterans from assigning their VA benefits to a third party. Consequently, although the direct sale of VA benefits is illegal--as is the VA’s payment of benefits to anyone other than a veteran, a dependent, or a lawful guardian or trustee, the scam attempts to skirt the law by masking these transactions as loans.
Basically, the perpetrators--who usually identify themselves as corporate entities--attempt to convince veterans to give up their benefit checks for a specified period in exchange for a lump-sum payment that typically represents 30 to 40 cents on the dollar. The VA Inspector General (IG) reported that in one instance a veteran received a lum- sum payment of $73,000 in exchange for his monthly benefits check of $2,744 for a ten-year period. At the end of the ten years, the veteran’s total repayment is estimated as $256,293. This translates to an annual interest rate of 44.5 percent.
The IG further reported that some clever perpetrators have devised methods of circumventing the law. In one of the contracts, a company required a veteran to have his VA benefit checks directly deposited into a specially created bank account. While the account and the benefit checks were in the veteran’s name, arrangements were made with the bank to allow the company to make monthly withdrawals in the amount of the benefit checks. Another contract arranged for a joint checking account to be created between the veteran and the company. The company then withdrew the amount of each benefit check as soon as the check was deposited.
Historically, the government’s position has been that once a benefit check has been issued to veterans, what they do with the money is of no concern. Unfortunately, this includes the freedom to enter into a detrimental agreement. Nevertheless, federal law also provides that benefit payments are exempted from the claims of creditors. Legally, while a veteran theoretically can sell his VA benefits (or use them for collateral), the benefits still belong to the veteran. This is an additional legal protection that allows veterans to keep their benefits after they receive them.
Accordingly, a company that offers cash for future benefits cannot garnish or attach subsequent VA payments in the event of a default on the contract. To overcome this prohibition, some companies require veterans to secure their contract by putting up some form of collateral. Furthermore, these companies may attempt to protect their payments in the event that the veteran dies before completing repayment by requiring him or her to purchase a life insurance policy that designates the company’s agent as a beneficiary.
The "cash now for future benefits" schemes discount cumulative benefits payments at very high percentages--often between 60 percent and 70 percent. These companies often describe the transaction as "discounted" and generally avoid using the terms "loan" and "interest" since the exorbitant fees and interest charges would be deemed usurious and illegal by most courts. Sometimes, there is a specific contractual acknowledgement that the veteran understands that the arrangement is not a loan. Such a disclaimer, on its face, would seem to exempt these transactions from state and federal truth-in-lending laws.
Although not yet tested in court, the VA IG has determined that these arrangements are probaby loans. In actuality, the veteran is receiving cash in return for monthly payments for a specified period of time. Often, the loan amount also is secured with collateral.
One American company has attempted to expand this type of scheme into Canada. An astute member of the Canadian Parliament, however, caught wind of the enterprise and began a public-awareness campaign among Canadian veterans. As a result, the company abandoned its plans and withdrew from the Canadian market.
Although there are, no doubt, many valid reasons to justify selling off future benefits for these paltry sums, there are unforeseen consequences of entering into such one-sided agreements. Those who receive lump-sum payments often tend to spend money faster than they need to, at the expense of future security. The VA IG recommends that when considering an offer like this, ask yourself whether you can afford to live without your monthly benefits after the cash advance is gone.
The IG and VVA warn you not to participate in these arrangements. These benefits buyouts can have a devastating financial impact on you and your family. Tragically, these schemes tend to target the most financially desperate veterans--those who are the most vulnerable. At the very least, before entering into any financial agreement, please consult with a trusted and reliable financial expert. There are other options available to obtain cash at much more favorable terms than these buyout schemes.
E-mail us at TheVeteran@vva.org