Defaulting on VA Loans: Options for a Disabled Vet

By Jonathan Ginsberg

What can you do when you're disabled, and an agency tries to collect on an old mortgage debt by seizing your disability payments? A Credit.com reader wrote in with this question:

My husband had a VA loan foreclosure in 1994. He was not contacted in any way about it (the Veterans Administration said they had sent letters to the old address in another state) and now with interest owes over $30,000. They claim there is no statute of limitations for this. Now they want to take all of his disability payment toward the loan. We have sent the financial statement along with letters to ask for a waiver. Is there anything else we can do?

You raise several very interesting issues that could involve both federal and state law. Obviously the least expensive and least stressful course of action would be to convince the VA to issue a waiver and it appears that you have started the process.

I contacted a VA administrator in Atlanta who directed me to two VA staff attorneys. Neither of the staff attorneys returned my calls or email so I didn't get any guidance directly from the VA. (The VA does list its loan centers.) I also contacted attorney Douglas Radunz in Minnesota, who handles VA loan disputes, and he was kind enough to make several suggestions.

Doug thinks, and I agree, that your husband's status as a disabled person should weigh heavily towards a waiver approval by the VA. Presumably your waiver request noted that he is disabled and included copies of any Social Security favorable decision, VA disability decision and/or other documentation showing that he is disabled.

If the waiver request is denied, it might be worthwhile to contact an attorney like Doug for a follow-up waiver request. It appears from my review of the VA regulations in this area that you would have the right to an informal hearing in the form of a personal meeting with a VA loan supervisor in your area.

As far as some of the legal issues you raise, here are my thoughts:

1. Statute of Limitations

The VA apparently believes that because they are acting in an administrative capacity, no statute of limitations applies. This seems contrary to our system of laws, although I was not able to find in the VA home loan regulations any discussion of this.

Should you retain counsel to assist you, your attorney would want to review applicable VA regulations, administrative decisions and case law to determine if there is definitive law about this issue, or if a common law doctrine called laches applies. Laches refers to situations where a plaintiff sits on the rights for so long before taking legal action that a judge might find that the claim should be barred as a matter of fairness.

You might also be able to challenge the legality of the VA's deficiency judgment procedure in light of your state's rules regarding deficiency claims. Attorney Radunz directed me to a class action case he litigated in Minnesota called Vail vs. Derwinski that found in favor of the class of veterans who successfully argued that the VA could not pursue deficiency balances for a variety of reasons, some or none of which may apply in your case. The Vail vs. Derwinski case might, however, provide your lawyer with some direction.

If the VA attempts to exercise a right of setoff in order to seize your husband's disability payments, you would most likely need to file an action in federal court to stop the seizure and for a determination on the merits of the seizure. Given that federal court lawsuits are expensive, you might want to ask one or more veterans' advocacy groups for a referral to a low cost or free veterans rights lawyer.

2. Failure of the VA to Properly Notify Your Husband About Proposed Action

This issue raises questions of what is called "due process of law" and could involve both federal and state law. Due process claims can involve questions of constitutional rights and would require the services of lawyers who deal with this complex area of law. Due process litigation can be very expensive but sometimes you can find lawyers in some of the large "silk stocking" law firms to take on this type of constitutional challenge pro bono (i.e., at no cost) in order to gain an opportunity to argue in a circuit court of appeals or even the Supreme Court.

Another avenue you might want to consider relates to the ombudsman's office at the VA. An ombudsman is a VA employee whose job it is to cut through red tape and assist veterans with formal and informal dispute resolution. (Go to this VA information page to learn about the ombudsman's office.)

Finally, you should not hesitate to contact your United States Senator's office or the office of your federal representative. Members of Congress often employ staffers to assist veterans in disputes with federal agencies and you may be able to enlist the help of your elected representatives to take on the cause of a disabled veteran fighting the bureaucracy of the VA.

I would also note that in my dealings with the Social Security Administration and the Veteran's Administration, adverse decision are often not a function of malice or insensitivity. These agencies are subject to a mind-numbing roster of rules and regulations and employees, especially those at the customer service level, do not have the authority to deviate from the regulations. Should an employee try to make an independent decision, his opportunity for advancement could be impacted and he himself would likely end up fighting the bureaucratic beast.

So, at this point, you have done all you can do by requesting a waiver. While you wait for your response, I would suggest that you start looking for a pro bono veterans advocate who is looking for a unique constitutional challenge that could enhance his resume, and establish a relationship with a veteran's liaison at your elected representative's office.

See more on Credit.com:
Military Families: How to Protect Your Credit
The Ultimate Credit Report Cheat Sheet
What's Really in Your Credit Report?

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