Debt payments are a common monthly expense. Whether it’s a mortgage, student loan, or credit card payment, debt helps us to acquire what we need when we may not have the cash to pay outright. After a job loss, suddenly those debt payments can become overwhelming; without income and a plan, you risk harming your credit rating or worse, losing your home or car. Thankfully, there are programs and strategies to help you manage debt if you’re dealing with a job loss, furlough, or reduced income during the Coronavirus crisis.
To manage debt properly after a job loss, the first step is to create a budget (LINK) and assess what income you have coming into the household. Essential expenses like food and utilities must be paid, then you can take stock of your debt repayment situation with clarity.
How much debt do you have? If you don’t know your total debts, the first step toward controlling your debt is to characterize your debts, then break them down into short-term (e.g., credit card), intermediate-term (e.g., car loans), and long-term (e.g., mortgage and home equity) debt. SAVVI can help you do this in the “Organize” function of the tool. Just add those credit and debt accounts and you’ll see your net-worth in real time. From there what are the required monthly payments for those debts, and can you meet them with your current income? From there you need to categorize debts in order of importance. For homeowners, paying the mortgage is likely your most important debt, as not paying could lead to foreclosure and losing your home. We’ll share some updates on programs to help with mortgage payments, but if you can still pay this debt with your current income, make it a priority. Similarly, your car may be secured by a loan. Nonpayment of a car loan could lead to repossession of your mode of transportation. While you may not be driving much now, having a car is likely essential for you.
Student loans are another significant debt for many. The CARES Act suspended payments and interest on Federal Student Loans March 13, 2020, through Sept. 30, 2020. If you have a Federal (not private) loan, you are not required to make payments on your loans during that time.
Credit cards provide purchasing flexibility, often with benefits and rewards based on spending. Unfortunately, credit cards often carry high-interest rates. If you follow best practices, you pay that debt off each month. If that’s not possible, you may have moved that debt to a low interest card or taken advantage of a low promotional rate offer. As a rule of thumb, while your mortgages, car and student loans and essential expenses take priority, you should, at the very least, try to make the minimum payments on your cards. If your budget allows, add as much extra as you can toward higher-interest balances to pay them down faster.
Talk to debtors
If you find yourself challenged to pay your debt, the most important next step is to reach out to your debtors to discuss what your options are. Banks and lenders, especially amidst the crisis are often willing to work with borrowers to find a solution that works for them, whether it’s extending the term of a loan and suspending payments for a period of time, leveraging federal programs for forbearance, or finding new products with your bank that may better fit your situation. A phone call could lead to much-needed budget relief until you get back to work.
Programs to help
The CARES ACT offered help to homeowners with federally backed mortgages by halting evictions and foreclosures on Federally- backed mortgages for those impacted by the COVID-19 Emergency. One of the features of this program–and a potential option for your mortgage–is forbearance, where your lender will forego payments for a defined period of time.
CARES Act mortgage forbearance must be requested, goes in to effect on Friday, 3/27/20, and will last for up to 180 days from approval. Additional 180-day extensions are available if needed. During mortgage Forbearance, you don’t have to make any payments, but scheduled payments and interest will still need to be repaid after the forbearance period is over. Interest continues to accrue as normal during forbearance. You won’t be charged extra fees for participating in a forbearance, but interest and principal are not forgiven, simply delayed.
What happens after forbearance is over? As you might imagine, forbearance could simply postpone a disaster if you owed all those delayed payments at once at the. Talk to your lender to ask about the specifics of your options; this could be the most important answer you get. Your lender may offer you an extension of your loan in order to avoid a large balloon payment at the end of your waived payment period or might be willing to renegotiate the terms of your loan in lieu of a forbearance. For non-federally insured mortgages, your lender still may have options to help you manage payments. It never hurts to ask.
Impact on Credit Score/Rating
Taking positive actions with your debt can also make a difference with your credit rating. Your credit rating and score determine your future borrowing ability. Missed payments, collections or foreclosure can negatively impact your credit for years to come. By working with creditors and making required payments you can preserve your rating–or potentially even improve it–as you work to get back on your feet.
While the burden of debt can feel overwhelming when you’re out of work, by taking stock of your debts and payments, working with creditors, and having a game plan to stay on track, you can keep your valuable assets and maintain solid financial footing for when you return to work.
If you've been financially impacted by the Coronavirus crisis, click here to fill out our interactive questionnaire and determine whether you qualify to receive a no-cost, targeted financial plan from SAVVI. The SAVVI plan will take into account the effects of the immediate crisis to help you navigate this difficult time, as well as help you keep working toward your future retirement goals.
SAVVI Financial LLC (‘SAVVI’) is an investment advisor registered with the Securities and Exchange Commission. SAVVI does not guarantee investment results and past performance is no guarantee of future results. Information provided is for educational purposes and does not constitute investment advice, which is only provided to registered users who have a valid Investment Agreement in place with SAVVI. No information on this presentation should be construed as an offer to buy or sell any security or insurance product. SAVVI is not a certified accountant, lawyer, tax professional, or HR professional. Nothing in this document may be considered as tax, accounting, employment, or legal advice. Please consult with your accounting, tax, human resources, or legal professionals before taking any action.