During this uncertain time, many people struggling with bills need a flexible financial plan that assumes the best while preparing for the worst. Here's a commonsense strategy you can adapt to fit your needs during the COVID-19 pandemic.
If you have an ownership interest in a small business, read Overview of Bankruptcy Options for Your Struggling Business During the Coronavirus.
Ultimately, your strategy will depend on your particular needs. Overall, using income, unemployment payments, or stimulus funds to cover necessary expenses—primarily food—while putting aside any surplus will likely be your best bet. If your financial situation improves and you find new employment in short order, you'll have the saved funds to catch up on payments.
The mistake most people make when planning for an uncertain future, however, is being overly optimistic. Most people who find themselves unemployed for an extended period end up filing for bankruptcy, and they often regret using money in an unproductive manner. The earlier that you accept the possibility of a bankruptcy filing, the more likely you'll avoid wasting resources on debts that you'll discharge (wipe out) in bankruptcy and, instead, use all of your funds on crucial needs.
Important Caveat. If you aren't familiar with bankruptcy, do your homework. You must qualify financially to receive a discharge. If you get a high-paying job, or you receive a significant amount of unemployment benefits, qualifying for Chapter 7—the quick chapter that doesn't require you to pay back funds to creditors—might not be a sure bet. Start by learning the basics of bankruptcy.
Perhaps, but you shouldn't count on it. Researching and applying for all programs available to you is a good start. Just be sure to pay close attention to whether you'll need to repay some amount at some point.
For instance, your state might forbid evictions temporarily but expect you to repay your landlord when the economy reopens. And most utility companies that have agreed not to turn off services during the pandemic will keep charging you. If you don't pay the balance once the outbreak ends, an eviction or a utility shut off will likely follow.
Because most programs aren't freebies, plan to pay the landlord or provider at some point, so you don't find yourself without heat or a place to live. But keep in mind that you might be able to negotiate a lower past-due amount or to pay the balance off in installments over time. If you've stashed away extra funds, you'll have the capital with which to work. However, if you can't come up with a workable agreement, or if you didn't save enough to bring your debts current, you'll want to consider wiping them out in bankruptcy. Back rent and utility payments are two obligations filers can discharge (erase) in bankruptcy.
Just keep in mind that bankruptcy comes with downsides. Not only will your credit rating take a hit for a few years, but if you discharge a utility bill, you'll likely need to put down a substantial utility deposit. Also, many landlords won't rent to prospective tenants for a year or two after a bankruptcy filing.
Important Tip. Many sole proprietors and independent contractors—such as daycare providers, freelance writers, personal trainers, motivational coaches, and club dancers—don't think of their work as falling under the category of an employee-paying small business. However, it might, and if it does, you—being the employee—might qualify for paycheck protection funds under those programs. It certainly won't hurt to apply. And receiving several thousand dollars might leave you pleasantly surprised.
Check whether you can defer your mortgage, car, or credit card payment (most tack skipped payments to the end of your contract) as well as your government-backed student loan payment. Other creditors might have programs, too. Just be sure you're familiar with the program terms and complete any required applications.
Many creditors have posted COVID-19 assistance program details on their websites, and you might be required to prove that COVID-19 has impacted you. Showing a job loss might be enough. But some people receive more in unemployment benefits than what they usually earn, so you might have to show you've suffered a negative financial change.
Find out about dealing with debt collector calls and letters.
Probably. But be aware of repayment terms. Also, you won't want to risk losing your house to foreclosure or your car to repossession, so apply for relief when necessary, and wait to receive confirmation of the payment postponement. Not only would it be expensive to fight those actions, but without an agreement, there's a good chance you'd lose.
It's usually best to file sooner rather than later, but not always. Because of the income cap in Chapter 7, most people find it easier to pass the means test and qualify for Chapter 7 bankruptcy when unemployed. Also, the sooner you file, the quicker your credit score will recover.
And filers are eligible for a Chapter 7 discharge only once every eight years. So if you've filed in the recent past, or you're still incurring debt—for instance, medical bills—it might be best to delay a bankruptcy filing. Once you file, you'll be responsible for all obligations you incur after the filing date.
Most people file for Chapter 7 if they're unemployed or aren't earning much at a new job. Chapter 7 is preferred because it wipes out credit card balances, medical bills, personal loans, and more; you don't repay your creditors; you keep the property you need to work and live; it's over in about four months.
Keep in mind that in Chapter 7, filers can lose unnecessary property, such as recreational vehicles or a stamp collection. You can find out whether you can protect your property by checking state exemption laws for the assets filers can keep in bankruptcy. Finally, bankruptcy doesn't erase all debts. Some debts can't be discharged in bankruptcy. For instance, you'll remain responsible for new tax balances and domestic support obligations and arrearages.
If you're making good money at a new job but still need bankruptcy help, Chapter 13 might be a better bet. Even though you'll pay your disposable income to creditors through a three- to five-year repayment plan, most people pay less than what they owe, and any qualifying balances get wiped out after you complete your payments. Chapter 13 has beneficial features that aren't available in Chapter 7, too, such as preventing a home loss or keeping a car from being repossessed by catching up on a mortgage or car payment over time.
If you think bankruptcy might be in your future, be sure to talk with a local bankruptcy attorney before you stop paying bills. Not only is understanding qualification requirements essential, but you'll benefit from a professional review and advice regarding the best option for you.