With more than 22 million jobless claims already filed, and more coming in the face of unprecedented economic damage related to the coronavirus, it’s a fate affecting all too many Americans: You had a job and suddenly lost it, with grim chances of finding another in the current landscape. You also happen to be saddled with debt.
Coronavirus-related financial distress is throwing a mighty wrench into America’s already complicated relationship with debt. Consumer debt in the U.S. reached a new record high of nearly $14 trillion in the second quarter of 2019, with increases in four major areas of debt: home mortgages, auto loans, student loans, and those pesky credit cards with their soaring interest rates.
As people deal with the debt they were already carrying, and any they might incur during this fractious period, here are some sensible steps from financial experts to help tackle it in whatever way you can.
Inspect your overall strategy
The first thing to do whenever you’re facing a serious financial crossroads: Breathe.
“If you’ve suddenly lost your job and have debt, it’s important not to panic and to avoid making any sudden or major decisions,” says Marcy Keckler, vice president of financial advice strategy at Ameriprise Financial.
Instead, take a step back and draw up a plan, balancing your pressing needs with debt and longer-term goals. “Assess your financial situation and take inventory of your debt—how much you owe, interest rates, and an overview of your total payment obligations including timing of payments,” Keckler adds.
The right path will depend on your particular circumstances, but there are some broad guidelines experts stand by.
“Focus on keeping up with your non-discretionary living expenses,” like rent or mortgage, food, and utilities,” advises Corbin Blackwell, a financial planner at Betterment. “While you cannot ignore your debt, your first priority is to make sure you can keep a roof over your head and food on the table.”
As you seek to solve your debt issues, cut back on discretionary expenses (new clothes, takeout meals, and other luxuries). Dip into emergency funds where need be, and avoid piling on further debt, or withdrawing from your 401(k), if you can.
“It’s easy to get into a ‘scarcity mindset’ and rack up more debt [by] telling yourself that you’ll deal with it later,” Blackwell says. “You want to make sure your financial decisions will make it easier, not harder, to get back on track financially once you’re back at work.”
Should I keep paying off debt?
As long as you’re able to cover your essential expenses during this time, you can keep chipping away at your debt. But not all debt is created equal.
Generally, it’s better to pay off debt with the highest interest rate first (usually credit cards), since it’s apt to escalate more quickly. Meanwhile, debt with lower interest rates like student loans is easier to put on the back burner.
Keckler says you should also keep an eye on payments for “your home and car to do all you can to protect those elements of your daily life.” If you risk losing one of those vital assets if you fall behind on payments, do what you can to hold onto them.
Will the government help me?
The federal government is trying to stave off financial collapse in the face of the novel coronavirus, but these efforts can be hard to understand.
The recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act has offered hope. Generally, if you’re earning less than $75,000 a year, you either should’ve gotten a stimulus check of $1,200 or it should be on its way, and married couples with kids can get additional funds. (If the IRS has your direct deposit information, the money goes right into your account.)
There’s another bright spot for those who have successfully filed for unemployment benefits. If you’re collecting that money, the federal government supplements your weekly amount by $600 for up to four months. And even if you’re waiting for that money, in most cases, it will apply retroactively.
The CARES act also addresses mortgages, including a 60-day prohibition on foreclosures for mortgages that are backed by the federal government, which began on March 18. People suffering financial hardship due to the virus qualify for 180 days of forbearance, meaning their loan payments are delayed or reduced, though interest continues to accrue.
If you have any federal student loans, you get another break: The same act allows you to defer all payments on those loans, including principal and interest, through September 30, 2020. Again, though, as you budget know that you’ll still need to pay in the long run.
Some state and other local governments are also pitching in with financial help in their own ways, like the Mayor’s Fund for Los Angeles, which is distributing pre-paid debit cards to some residents, so it’s imperative to check what’s offered in your area.
Collectively, any extra cushion you qualify for can be critical for both basic living expenses and high-priority debt payments. Covering even the minimum payment amounts can stop a painful ding to your credit score.
Work with, not against, your bank
The government isn’t the only entity taking new measures to sort through the uncertainties caused by the coronavirus. Banks, not always known for their friendly policies, are in some cases alleviating matters for their customers.
“Check your lender’s website to see if there are any details on relief options,” Keckler says. Those details might be buried in the torrent of emails companies are sending out to customers, so search your inbox.
It may also be worth calling your lender to explore options, “but be prepared for long wait times,” Keckler adds, so don’t forget the merciful power of keeping your phone nearby on speakerphone while you go about your life. As a respite, some companies are offering online chats with a representative.
Direct contact can be especially useful when lenders don’t publish their policies online. Speaking to an actual human can illuminate crucial details, and build your knowledge for future financial moves.
If you’re worried you won’t be able to make scheduled payments on your debt, this is not the time to avoid the problem.
“Contact your creditors right away to let them know,” Keckler instructs. “Often, you can negotiate an adjusted payment schedule or interest rate. Be sure to keep records of your contacts and conversations with your creditors for future reference.”
Act as calmly and directly with your lenders as possible, and let them know the full scale of your financial picture. Remember: we’re all humans struggling to get through this moment together.
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