I’ve been helping people triage problem debt full time since 1999. Over that period of time, there’s little I haven’t seen happen to blow up someone’s personal finances. Then comes a global pandemic. And this crisis is unlike anything we’ve seen before.
This is uncharted territory for all of us. What’s going to happen to our jobs, families and household finances for an undetermined period of time will all be new.
That said, some of my past experiences helping people in times of trouble may prove useful.
While in crisis mode, hunker down
Before I outline what credit card banks and other lenders did in the past to deal with increased default rates on unsecured accounts, let me start off saying this:
Doing nothing about your debt is a legitimate strategy! It’s not a long-term fix, of course, but hunkering down with your finances until you have clearer visibility into what your household finances will look like over the next few months is sometimes the best thing you can do. That said, if you’re fortunate enough to have a stable income during this period, you may have some options to consider in the near term.
Years ago, I wrote this brief review of the six best ways to deal with a debt problem. At that time, the option of doing nothing about debt was intended to apply only to a small group of people. During the crisis we find ourselves in today, that option likely applies to the majority of people.
Feel free to bookmark that article, save it for later and review it when your forward-looking financial picture can be better known (more about that below).
Reach out to lenders (they want to work with you)
Banks, lenders, state and federal regulators and many others are all coming together to try to help those of us experiencing financial shocks due to COVID-19. We’re in the earliest stages of financial relief efforts, so expect what has already been announced — and the notices from creditors offering options and programs — to continue. (Resolve has put together this crisis-related list of resources and will update regularly.)
Here are some tips I can share from the 2008 housing market-led recession and natural disasters such as hurricanes Katrina, Sandy, and others:
Get in the crisis safety zone to preserve your cash
During the 2008 housing crisis, we saw every manner of mortgage relief program. Some of them were super helpful, some could have been implemented better, and some seemed to be only geared for the benefit of lenders. The crisis we’re in today will look very, very different.
This crisis could usher in the worst unemployment situation our nation has seen since the Great Depression. There are already programs talking about allowing you to put your mortgage in forbearance for a year.
Auto lenders are creating programs to help borrowers defer payments and avoid repossession.
Mortgages and car loans (examples of secured loans, which are backed by collateral) are typically far more important to a household than credit cards and personal loans (examples of unsecured debt), so what about unsecured debts?
We are already hearing of programs to help you defer a few months of payments on those, too. (Here’s a list of individual creditors and instructions for how to handle each). Should you take those options when they’re available to you?
Taking advantage of resources that you’re not sure you ultimately need — in order to weather the current economic storm — often makes sense. This is the “hunker down financially” mode that I’ve strongly recommended in recent days.
Banks and other lenders are offering to let customers skip some payments while not reporting that to the credit bureaus as a late payment, not hiking your interest rates, not charging late fees and even waiving interest accumulation. Taking advantage of these offers means you are in the safety zone to preserve cash.
Talk to all your lenders in the coming weeks and months to see how they can work with you to lighten the financial burdens you’re experiencing now or will be experiencing in the near-future.
What if you can’t pay long-term? Well, that’s when that article about the six best ways to deal with a debt problem I mentioned earlier will come into play (but likely with some new twists).
Debt relief past is prologue to this crisis
During the Great Recession that started in earnest in 2008, banks saw credit card default rates they’d never seen before. And instead of referring people to nonprofit credit counseling agencies (as was their common practice), they reacted by offering direct-to-consumer hardship plans. These plans lowered interest rates and allowed consumers to pay down their debt with lower monthly payments. Banks kept offering these hardship plans long after the recession ended, and they still do today.
Because a trained credit counselor can talk to you about your options with more than just one debt, and even your mortgage and housing costs, I recommend talking to one first. (We can connect you with someone directly if you’d like. Schedule a call here.) You’ll get a more complete picture of your relief options — not just what one bank is offering.
Preapproved settlement offers may be on the horizon
At the beginning of the 2008 financial crisis, when banks saw record high defaults, they started sending out preapproved settlement offers if you were only two or so months late. That kind of thing just never happened before, and certainly not at the rate of savings many were offering. Only one bank continued that effort in a meaningful way after the recession, and still does it today with some account holders. I expect that to change once again, and because of the size and scope of this crisis, I expect it across the board, with nearly all brick-and-mortar banks.
Online lenders, and those exclusively offering personal loans, may not be as effective at implementing monthly payment forbearance. Historically, they haven’t been that great at working directly with consumers to settle either. I expect that to change, too — or at least for settlement outcomes to be much better while still using their debt collectors or buyers.
There’s little choice other than for everyone involved in the U.S. debt collection apparatus (creditors, debt collectors, debt buyers) to lower their expectations. That goes for accounts that were in collections even before this crisis, too.
When you should take advantage of relief options
For most people it will make sense to wait.
No one knows how long this epic crisis will last. I know I am allowing myself a healthy dose of my typical optimistic outlook. But if you’ve ever weathered financial hardships, or work with people who have, you know these things can go on for longer than we hope. It literally pays to be cautious! However, if you don’t believe your income will be negatively affected during this crisis (and for many, it won’t be), now could actually be the best time to get out of credit card and other unsecured debts.
I haven’t mentioned filing for bankruptcy. If you qualify for Chapter 7, you could get a fresh financial start, and in just a couple months!
Here again, even with Chapter 7, I would wait.
What if this hunkering down thing lasts longer than you think it will, or want to bear the thought of? You could have more debt soon, and Chapter 7 is most appropriate when you can include all anticipated debts.
A word about your health … and some anticipated twists
This is a global health crisis. God forbid you experience uncovered and unsurmountable health costs during all this, but if you do, medical bills can also be included in your bankruptcy.
I expect personal and business bankruptcy filings to skyrocket past what was seen in 2005, when bankruptcy laws changed that made it harder to qualify for Chapter 7.
So … what about those “twists” I mentioned above? Those may also be worth waiting for.
What if, as a result of this pandemic, your state legislators passed better home equity protections like Florida and Texas have today? They could, and should. This could allow you to protect your home in Chapter 7, not just Chapter 13.
What if your state lawmakers stopped listening to the debt collection and bank lobbies and protected your wages from garnishment like Pennsylvania, North Carolina, and South Carolina do? They could, and should. This will allow your state and the nation as a whole to move forward with economic recovery faster, after the COVID-19 smoke clears. You can get back to work and build up the economy, rather than looking at the prospect of pandemic-related unpaid bills taking you to court and attaching your paycheck.
What if lawmakers at the federal level passed laws that protect you better in these areas? What if they got rid of the law that prevents student loan discharge in chapter 7 bankruptcy?
They could, and should.