When it comes to dealing with your debt, coronavirus changes everything you know, assume or believe. As I said in The Coronavirus Might Just Kill Your Finances Before It Kills Anyone You Know, the financial implications from this pandemic are serious and severe.
So let’s talk honestly about crisis debt reality. This is the honest advice you need right now but you might not want to hear it.
If Your Income Has Been Reduced or Eliminated
The least important factor to consider right now is your credit report or credit score. I know that sounds crazy but it is absolutely true. You can’t eat your credit score for lunch.
What is the most important item to focus on right now is to immediately reduce all discretionary spending, cancel monthly subscriptions and evaluate all other expenses. This a good time to shop around for things like cheaper car insurance for the same coverage, less expensive mobile phone service like Consumer Cellular, and check with your cable company about cutting back on channels and streaming more video instead. I’ve done all of these. myself and saved a lot of money each month.
Your cash on hand is like needing water to cross a desert. It will be the most precious thing you have right now. You need to conserve it as much as possible and more importantly, you need to make some difficult and uncomfortable choices. You don’t want to get halfway across a hot desert and run out of water. You don’t want to find yourself unable to pay for food, utilities, and a place to live either.
Now is NOT the time to enroll in a debt settlement, credit counseling, debt validation, or other debt relief program. Bankruptcy should not be the trigger you pull right now either. For bankruptcy, we need to wait until you have headed out the other side and you have a good path post-apocalypse.
Don’t Drain the 401(k) or retirement account
The only thing that will happen if you drain or cash out your protected retirement accounts is you will retire broke and hungry.
Your retirement account is not a piggy bank. The funds are often protected from creditors if you leave them in.
A loan from your 401(k) is probably due and payable if you lose your job or change employers.
There are few positive points to tapping the 401(k) in a financial emergency unless you do it in such a way you understand all the current and future penalties for doing so. Ultimately it is your choice if you want to throw away your retirement money.
Your Credit Doesn’t Matter in a Crisis
There is no mistake we are in an economic crisis because of the effects of this pandemic on the U.S. and the global economy.
Credit can be rebuilt but you can’t print money to put food on the table.
When many people are facing difficult times, like in the 2008 Great Recession, creditors will eventually start lending again by lowering standards. A traumatized credit score now is not a death sentence. It’s more of an inconvenience and annoyance. Besides, you don’t need more credit right now if your income is slashed.
Surviving and keep a roof over your head and food on the table is your priority.
If You Have Remaining Credit on Your Credit Cards
If you are already out of cash but still have remaining credit on your credit cards, you just might consider maxing them out to survive. There are all sorts of moral and other considerations for doing this but if the choice is between not having food or overextending your credit cards, the card path is a solution.
Keep in mind that normal public safety net benefits like SNAP, food stamps, unemployment, or other benefits may not be available or accessible so you’ll have to do what you have to do. It’s not a great reality, it just is what it is.
What You Really Need is a Plan
Before you do anything what you really need is a plan. If you are in the middle of a traumatic financial situation, you are the least capable of making good decisions because it is emotional and you have no experience in what to do.
I can’t stress highly enough that talking to a professional debt coach like Damon Day is the smartest thing you can do. Damon helps his clients create customized financial solutions based on reality, experience, and the situation. If Damon is not available and booked up, try Michael Bovee. He’s another exceptional independent debt coach.
Don’t Think Most Debt Relief Companies Will Give You Good Advice
Good advice is the exception and not the norm when it comes to debt relief companies. Debt relief groups are primarily sales outfits that are trying to sell their solution to you no matter if it is appropriate or not. They aren’t financial advisers that have a fiduciary duty to you, the client.
It’s no surprise that commissioned salespeople are strongly motivated to make the sale to earn their income.
But I’ve already heard about some disgusting situations where people laid off last week had been told by some credit counseling and debt settlement companies to enroll in their programs. Without any replacement income, any debt relief program that requires monthly payments may just be sucking you into a dark hole.
If you will not be able to make ends meet and wind up only making 12 payments in a debt program that is expected to take 48-60 months then what have you accomplished? Nothing.
All that you’ve done is send off 12 payments that will not eliminate your problem and you have wasted 12 payments you should have saved or used for emergency supplies. Tragically, those payments could have been at least saved in an emergency fund or for retirement. You can use my online calculator to see how much those payments will cost you in lost retirement funds.
If you are currently in a debt settlement program and have escrow funds saved up, you should read read this article.
Bankruptcy is a Good Thing
I find that most people have the wrong assumptions and myths about bankruptcy. FACT: Chapter 7 bankruptcy is the least expensive way to eliminate most consumer debt in the shortest period of time.
Bankruptcy is not the end of your financial life, it’s the beginning.
- Those That File Bankruptcy Do Better Than Those That Don’t
- The Fine Art of Getting Out of Debt
- So You Are Going to File Bankruptcy. That’s Great News. Congratulations.
But pulling the bankruptcy trigger early is a mistake. The best type of bankruptcy to file to get a fresh start is a Chapter 7 bankruptcy. You can only file a Chapter 7 bankruptcy once every eight years. Don’t waste the gift of financial fresh start afforded to you by the U.S. Constitution until all the money damage is done. It would be horrible to file bankruptcy early and then have more debt build-up.
Following bankruptcy, it is relatively easy to rebuild your credit. Read How to Easily Rebuild Your Credit and Have Good Credit Again After Bankruptcy and Life After Bankruptcy – The Truth.
So What About Debt Collectors and Lawsuits
If your income has been lost, you are just trying to survive, fell behind on payments, and are now getting collection calls and letters — Don’t Panic!
Many others are in the same position you are. The primary task here is to not panic and get upset, aggressive, or emotional with any collector that might call. You are just the next call they have to make. They are not judging you.
However, some debt collectors may try and intimidate or scare you into making a payment or promise to pay. Don’t do it unless you can really afford to make that commitment.
You may be threatened with a lawsuit or actually get sued. If you are sued, it really doesn’t matter if the underlying financial situation hasn’t changed and you are still struggling to survive on reduced or lost income. You can go to court, politely explain your situation, potentially lose and then you can eventually eliminate that resulting debt in your potential future bankruptcy anyway.
You just need to approach collection efforts and lawsuit threats or actual filings by being polite, explaining your situation, and standing your ground when you don’t have the money to pay. It just is what it is but don’t make any promises you actually can’t afford.
If Your Income Has Not Yet Been Reduced or Eliminated
Now is the time to trim, trim, trim all discretionary expenses and build that emergency savings account in case your situation changes. While you might not lose your income, you might get sick and need money to get over that hurdle.
Think about it like this, you don’t wait until bombs are falling to prepare for an attack.
Saving money right now is like preparing for a financial attack.
Cash is king.