With the abundance of military personnel in North Carolina and a growing number of military operations affecting them, it is important that creditors remember to use caution when dealing with military personnel. Military personnel have certain protections not enjoyed by civilians that can be a potential trap for unwary creditors. Those protections are set forth in the Soldiers' and Sailors' Civil Relief Act (the Act), a federal law passed during World War II and amended during the Persian Gulf War.

Protections Provided by the Act

The Act allows a court to suspend temporarily the enforcement of the civil liabilities of any "person in military service" while on active duty. The term "person in military service" includes members of the Army, Navy, Air Force, Marines, and Coast Guard, and officers of the Public Health Service.

The Act gives any court the authority to vacate, set aside, or stay any such action against a person in military service. Moreover, any stay extends to all other sureties, guarantors, endorsers, or accommodation parties, whether primarily or secondarily liable and whether a military person or not. For example, if a soldier's parents guarantee his car loan, they enjoy the same protection as he if he defaults and the creditor attempts to collect.

However, a person in military service is not automatically entitled to a stay of any execution, attachment, garnishment, or other proceeding. A court must allow a creditor's enforcement action to continue if defense of the action is not "materially affected" by reason of the debtor's military service. Who bears the burden of proving that the debtor will or will not be "materially affected" by the military service? That is left to the court's discretion, but the general practice is to put the burden on the creditor.

The Act also prohibits creditors from discriminating against military personnel who invoke the Act, forbids creditors from penalizing military personnel during a stay of enforcement actions, and caps the interest rate a creditor may charge while a stay is in effect. A creditor who attempts an eviction or foreclosure proceeding in violation of the Act may be subject to fines and imprisonment.

How Should Creditors Respond?

Creditors can take some simple steps to avoid problems under the Act. First, as with any other extension of credit, a creditor should know his debtor. Determining initially whether any debtor parties are in military service, including guarantors and endorsers, can be easily accomplished.

Second, the Act contains an important waiver provision that a creditor may be able to employ. Certain formalities must be met for the waiver to be valid. A guarantor or similar person secondarily liable on a military person's obligation may waive the Act's protections if the written waiver is in an instrument separate from the principal obligation or liability. Thus, if a non-military surety guarantees a promissory note, the waiver must be part of the guaranty agreement and not the note.

The Act has another provision applicable to transactions in which real or personal property serves as collateral. A creditor may modify or cancel any contract or lease, or any obligation secured by a mortgage, deed of trust, or similar security without violating the Act so long as allowed by the written agreement between the creditor and debtor executed during or after the period of military service. Also, the creditor may foreclose on real property or personal property collateral securing the obligation if such action is permitted under the terms of a contract executed during or after the period of military service.

Creditors regularly extending credit to military personnel need a thorough understanding of the Act. To learn more, contact Lance Martin, Michael Flanagan, or Paul Fanning.