VA Issues Interim Guidelines on Debt Collection Waiver as a Result of Legislation

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2 Copyright 1990 by National Clearinghouse for Legal Services. All rights Reserved. 24 Clearinghouse Review 829 (December 1990) VA Issues Interim Guidelines on Debt Collection Waiver as a Result of Legislation by the National Veteran's Legal Services Project I. Introduction Under the Veterans' Benefits Amendments, /1/ passed on December 18, 1989, the statutory standard for waiver of debt collection was eased. If the Department of Veterans Affairs (VA) assessed a debt against a veteran and the veteran subsequently applied for a waiver of the debt, the prior statutory provision stated that if the VA found "fraud, misrepresentation, material fault, or lack of good faith on the part of the [veteran/debtor]," the VA was required to deny the waiver request, /2/ and if the VA made no such finding, it would move on to assess the second requirement for granting a waiver: whether collection of the debt would be "against equity and good conscience." /3/ The Veterans' Benefits Amendments of 1989 changed the standard for denying or granting a waiver of debt collection by replacing the phrases "material fault" and "lack of good faith" with the phrase "bad faith." /4/ This change makes it easier for the veteran/debtor to obtain a waiver, because the VA will find it more difficult to deny a waiver request on the ground of "bad faith" than on the ground of "material fault" on the veteran's part. Because it will be relatively easy to overcome the issue of fraud, misrepresentation, and bad faith, most cases will reach the issue of "equity and good conscience." The practical effect of the change in the law is to reduce the issue of "fault" from a key issue in a waiver decision to a "factor" that can be balanced with a number of other factors. II. VA Implementation of New Standards Following passage of the legislation, the VA suspended consideration of all waiver requests. On January 31, 1990, the VA Central Office issued a draft circular to regional offices that ended this suspension and provided interim guidelines for handling waiver claims under the new statute. On February 12, 1990, this circular was issued in final form. /5/ It is the precursor to regulatory and manual changes. /6/ The new standards apply to all initial waiver requests, notices of disagreement, substantive appeals of waiver denials, and remands by the Board of Veterans Appeals (BVA), even if those denials were made under the old standards. Regional offices are instructed to apply the new standards to any requests, notices of disagreement, substantive appeals, and BVA remands that were pending on December 19, 1989, when consideration of waiver requests was

3 suspended. In cases in which the VA denied a waiver request or upheld a denial of a waiver request under the old standards, but the claimant had not been notified of the decision at the time of the suspension, the circular directed the regional office to review the request again under the new standards. On the other hand, under the circular, if a waiver was granted or waiver denial was reversed without notice to the claimant prior to the suspension, the decision was to stand and the regional office was instructed to notify the claimant immediately. III. Reconsideration of Prior Decisions As a general rule, in the absence of an appeal, waiver decisions made by the Committee on Waivers and Compromises (COWC) at VA regional offices are final. /7/ However, under 38 C.F.R. Sec (a), waiver decisions can be reversed or modified for a number of reasons, one of which is a change in law. In a precedent opinion issued on July 17, 1990, /8/ the VA General Counsel (GC) held that final waiver decisions made before the enactment date of the Veterans Benefits' Amendments must be reconsidered under the new standard. Absent a provision establishing otherwise, the effective date of a law is 12:01 a.m. on the date of enactment. The provisions of the law involved here were not made specifically retroactive. Therefore, their effective date was December 18, Nevertheless, since 38 C.F.R. Sec does not limit reconsideration of a waiver decision to retroactive changes in the law, the GC found that veterans can take advantage of the more liberal statutory standard by using the regulation to ask for reconsideration of a waiver request denied prior to December 18, However, because the law is not retroactive, only the amount of the debt outstanding on December 18, 1989, would be eligible for waiver. /9/ The GC opinion addressed the issue of possible refunds as a result of reconsideration of waiver requests. Generally, a waiver applies to amounts of the debt already collected as well as amounts not yet collected. In this opinion, the GC held that if the VA grants a waiver after reconsideration of the request under the new standard, it would be inappropriate for the VA to retain the amounts collected previously. However, this would apply only to amounts collected after the effective date of the law. Amounts collected before the change in the standard are not eligible for waiver and the VA may retain them. /10/ The opinion further stated that reconsideration of waiver requests would not be automatic. /11/ Thus, advocates are advised to file immediate requests for reconsideration of past waiver denials on behalf of any affected clients. In addition, the opinion provides that the COWC that has jurisdiction may reconsider a waiver request even if it was previously appealed to the BVA and denied and that the COWC's denial of a waiver request on reconsideration can be appealed to the BVA. /12/

4 IV. Standards Defined Pursuant to the statutory change, the interim guidelines reflect that fraud, misrepresentation, or bad faith on the part of an individual requesting a waiver will automatically preclude the granting of a waiver. In considering a waiver request, the VA will make this determination first. In order to find fraud or misrepresentation, the VA must determine that there existed "a willful misrepresentation of a material fact, or the willful failure to disclose a material fact, with the intent of obtaining or retaining, or assisting an individual to obtain or retain, eligibility for VA benefits." /13/ Further, the VA must show that the individual acted with the knowledge that the misrepresentation or failure to disclose information would result in the erroneous grant or retention of benefits. The circular emphasizes that the VA must prove willful intent on the part of the debtor and that the VA bears the burden of showing such intent. If the VA cannot prove willful intent, there can be no finding of fraud, misrepresentation, or bad faith. The circular defines bad faith as "[a] willful intention to either seek an unfair advantage or to neglect or refuse to fulfill some duty or contractual obligation." /14/ The guidelines set out an example of a situation in which bad faith would most likely exist in the context of the home loan program: a veteran-borrower abandons the property that he or she has purchased with a VA-guaranteed home loan even though the borrower is financially able to fulfill the mortgage obligations. In addition, the circular specifically states that bad faith cannot exist if the loan has been assumed by, or title has been conveyed to, another individual whose subsequent failure to fulfill the obligation created the default. /15/ The circular then sets forth guidelines for determining whether collection of the debt would be against equity and good conscience in those cases in which the VA finds no fraud, misrepresentation, or bad faith. However, it does not contain a definitive interpretation of this standard. Rather, it states as follows: "The phrase 'equity and good conscience' is not capable of an exact definition. In general, to demand payment when it would be unfair, unconscionable, or unjust, would be against equity and good conscience." /16/ In making this determination, the VA is required to consider the factors set forth at 38 C.F.R. Sec (a). /17/ Those factors include the following (section 1.965(a) states that this list is not intended to be "all inclusive"): fault of the debtor in the creation of the debt; a balancing of the debtor's fault with that of the VA; whether collection would cause undue hardship to the debtor; whether collection would defeat the purpose of the benefits; whether failure to collect the debt would result in the unjust enrichment of the debtor; and

5 whether the debtor has changed his or her position for the worse in reliance upon the VA benefits. The guidelines elaborate upon all of these factors except the balancing of fault. As set forth in the circular, "fault" is defined as "[t]he commission or omission of an act that directly results in the creation of the debt." /18/ The circular states further that "[f]ault can exist without a willful intent to deceive or defraud." /19/ The VA will take into consideration the age, intelligence, education, and physical and mental condition of the debtor. Fault would exist if a debtor should reasonably have known that payment was erroneous, that an overpayment occurred, or that information provided to the VA was incorrect. If the debtor failed to provide pertinent information and should have known that such information was necessary to the determination of benefits, fault could be found to exist. /20/ In a balancing of fault situation, if the beneficiary timely provided the VA with the necessary and relevant information and the VA did not act to adjust the benefit award, then the VA's failure to act would be a major factor in apportioning fault and in determining the amount of the waiver. In home and education loan cases, the VA will consider the issue of fault in terms of the breach of a contract. It will examine whether the veteran/debtor had some degree of control in the situation that led to default or breach and whether he or she acted in the manner expected of one exercising a high degree of care. The guidelines also suggest that no fault should be found in loan guaranty cases in which the veteran-seller had "no reasonable choice other than to sell the property" /21/ and a subsequent purchaser defaulted, unless the VA had informed the veteran-seller prior to the sale that the purchaser was not qualified to assume the loan. "Unjust enrichment" is defined as an unfair gain to the debtor. This gain may take the form of money, property, or services at the expense of the government. /22/ If failure to collect would result in unjust enrichment, the debtor would be duty-bound to repay the amount. Causing "undue financial hardship" means that collection of the debt will seriously impair the debtor's ability to provide the basic necessities of life for himself or herself and his or her family. In order to establish whether hardship might occur, the VA will consider all sources of family income, assets, essential and exceptional expenses, and the debtor's likely financial situation for the next few years. /23/ The VA also considers whether collection of the debt may "defeat the purpose of the benefits." /24/ If the VA benefits involved are a principal means of support for the beneficiary, then the purpose of the benefits would be defeated by collection. This situation would usually arise when the debtor receives running compensation, pension, or education benefits. "Changed position" refers to a situation in which a beneficiary gave up a valuable right or changed his or her position for the worse, based upon an erroneous payment or an overpayment. For example, the debtor may have relinquished additional sources of income (e.g., a new job) or incurred increased legal debts in reliance upon the incorrect payment or the overpayment. These are only general guidelines for the VA to apply. The circular states specifically that "[t]here is no set formula or guideline for the Committee [on Compromises and Waivers], other than [that requiring preclusion of a waiver by fraud, misrepresentation, or bad faith and

6 defining those terms]." /25/ In addition, the circular reminds regional offices that "each case in which a waiver is requested is unique and must be decided on its own merits" /26/ and that "any reasonable doubt must be resolved in the debtor's favor." /27/ V. Basic Debt Collection Issues An individual against whom the VA has assessed a debt always faces these two issues: (1) whether the VA action that creates the debt is valid; and (2) if the VA action is valid, whether the debt should be waived. Therefore, an advocate representing a client in a VA debt collection case should pursue both of these issues, challenging the decision creating the overpayment and, in the alternative, requesting a total or partial waiver. A successful dispute of the debt will eradicate the debt altogether; on the other hand, by granting a waiver, the VA acknowledges the existence of the debt, but waives its right to collect it. If a veteran/debtor succeeds in obtaining a waiver for an amount greater than $600, the VA will report the income to the Internal Revenue Service. Thus, because overcoming the existence of the debt results in no taxable income and the grant of a waiver usually results in reportable, taxable income, it is almost always advisable to dispute the debt and assert the alternative argument that a waiver should be granted. Once the VA has determined that a debt exists and moves on to the issue of whether a waiver should be granted, equity and fairness will enter into the equation. The advocate should forcefully argue based on these considerations, presenting a balancing of the client's fault with that of the VA and any mitigating factors as set forth in 38 C.F.R. Sec (a) and the circular. Showing that the client was not able to understand fully the situation leading to the creation of the debt because of, e.g., age, intelligence, education, or physical or mental condition may be a mitigating factor. The advocate might use a statement of the debtor's family income and expenses to argue that collection would cause financial hardship. Although it is not clear whether the statute or the regulation supports such an argument, the advocate should consider challenging the circular's directive that all income sources be counted in determining whether financial hardship exists. Whether collection of the debt would defeat the purpose of the benefit is a key issue, since it takes in many of the other considerations. For example, if a recipient of educational benefits would have to leave school or a compensation or pension beneficiary would be unable to provide basic necessities for his or her family, then the purpose of the benefit would be defeated. In addition, advocates must remember that VA debt collection is not an "all-or-nothing" prospect. The VA has the authority to pursue collection of part of a debt if equity dictates. In other words, it can grant a partial waiver of a debt. Thus, if the advocate requests a total waiver on behalf of the client, it is important also to request, in the alternative, a partial waiver.

7 footnotes 1. Veterans' Benefits Amendments of 1989, Pub. L. No , Sec. 304(a), 103 Stat (1989) U.S.C. Sec. 3102(c), prior to amendment by Pub. L. No U.S.C. Sec. 3102(a), (b). 4. Veterans' Benefits Amendments of 1989, supra note 1, at Sec. 304(a). 5. Veterans Benefits Admin., Dep't of Veterans Affairs, Veterans Benefits Administration Circular No , New Standards for Waiver Consideration (Feb. 12, 1990) [hereinafter VBA Circular]. 6. Amendments will eventually be made to DEP'T OF VETERANS AFFAIRS (VA), VA MANUAL MP-4, VA FINANCIAL POLICY, Pt. I, ch. 8, Sec. B, Para. 8B.02 and 8B.03, in accordance with the circular C.F.R. Sec (b). 8. General Counsel, VA, Precedent Opinion No , Reconsideration of Final Waiver Decisions in Light of Pub. L. No (July 17, 1990). Precedent opinions of the VA General Counsel are binding on all VA officials, interpreting statutes or regulations, clarifying or modifying prior opinions, or otherwise having significance beyond the matter at issue. 9. Id. at Id. at Id. 12. Id. 13. VBA Circular, supra note 5, at Id. at Id. 16. Id. (emphasis added). 17. Id. 18. Id. 19. Id. at 3.

8 20. Id. at Id. at Id. 23. Id. 24. Id. at Id. 26. Id. 27. Id.