Nearly 10,000 California National Guard members were being ordered to pay back at least USD 15,000 each in bonuses used as inducements during recruitment drives to overcome a troop shortage.
The national guard members would have faced interest charges, wage garnishments and tax liens if they refuse to comply.
The Pentagon sought repayments after audits found the California National Guard had overpaid troops in an effort to meet enlistment targets
"I have ordered the Defense Finance and Accounting Service to suspend all efforts to collect reimbursement from affected California National Guard members, effective as soon as is practical," Carter said in a statement.
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"This suspension will continue until I am satisfied that our process is working effectively."
He noted that "many" soldiers did not know they were ineligible for the benefits they were claiming "as a result of errors and in some cases criminal behavior by members of the California National Guard."
"Too many cases have languished without action. That's unfair to service members and to taxpayers."
Carter said he has ordered a team led by the Pentagon's personnel chief Peter Levine to come up with "a streamlined, centralized process that ensures the fair and equitable treatment of our service members and the rapid resolution of these cases" by January 1.
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