If you’re one of the millions of Americans who's been laid off or furloughed as a result of the coronavirus pandemic, your cash flow may have slowed to a trickle or stopped altogether. But the bills, of course, just keep on coming. It helps to have a plan in place to manage your finances until the crisis passes and you’re back on the job. Here’s some advice on how to pay your bills and when you may be able to postpone paying them.
- Although the coronavirus pandemic led to layoffs and furloughs, it hasn't stopped the bills from coming in.
- If cash is in short supply, a credit card or checking account line of credit can help in the short term.
- Check with your creditors to see if they're willing to help you with delaying payments for certain expenses like rent, mortgage payments, and insurance premiums.
- The federal CARES Act, passed in March 2020, made important changes to the rules on 401(k) loans and withdrawals as well as student loan repayments.
- Try to maintain the integrity of your credit rating and, if you can, build (or rebuild) your emergency savings account.
Where to Turn for Money
In normal times, the ideal way to handle credit cards is to pay your balance in full each month and avoid the often-exorbitant interest charges. These, of course, are not normal times.
So if cash is in short supply, running a balance on your credit card for a few months may be a practical option. If you have more than one credit card, start with whichever one has the lowest interest rate. If you reach your credit limit on that one, move on to another. But remember, we’re talking about necessities here—not a shelter-in-place shopping spree.
You should then aim to pay at least the minimum balance that’s due on your cards each month. If that’s a problem, some banks and credit unions allow customers to defer payments while waiving their customary penalties. So it’s worth checking your credit card issuers’ websites to find out what help they’re offering and how to apply for it. The best time to do that, and make the necessary arrangements, is before your next bill is due, not after.
Debit Cards and Checking Accounts
The amount you can charge to a debit card or withdraw from an automated teller machine (ATM) is typically limited to the balance in your checking account. However, you may also have a credit line attached to your checking account that you can dip into once your balance hits $0.
Checking credit lines, or overdraft lines of credit as they’re often called, are generally small—$500 to $3,000, for example—and you’ll have to repay the money with interest. But it’s another source of cash in a pinch, and in the current crisis, some banks will increase your credit line if you ask.
Raiding a 401(k) or similar retirement account before you retire is usually a bad idea. However, if that’s where most of your savings are, it might be your only option. There are two ways to take money out of a 401(k): loans and withdrawals. Each has pros and cons.
- 401(k) Loans: You can normally borrow money from your 401(k) and pay it back over a specified period of time, which is typically five years. The Coronavirus Aid, Relief, and Economic Security Act (CARES), passed in March 2020, introduced some new rules for people affected by the coronavirus pandemic, raising the borrowing limits (from $50,000 to $100,000) and allowing borrowers to delay repayment in some cases. However, it’s up to your employer whether to implement the new rules or just stick with the old ones. Either way, it’s worth remembering that the money you borrow will no longer grow tax-deferred. And if you’re unable to repay the loan when it comes due, you’ll face additional penalties.
- 401(k) Withdrawals: Simply withdrawing money from your 401(k) is another option, and usually an even worse one. You’ll owe income tax on whatever amount you withdraw and you'll be subject to a 10% penalty by the Internal Revenue Service (IRS). However, the CARES Act waived this penalty for withdrawals made in 2020 if you were under the age of 59½. Nonetheless, you must repay the 2020 withdrawal over the subsequent three years or the money won’t be there for you when you retire and really need it.
Note that if you have money in an individual retirement account (IRA), the withdrawal rules are similar, but loans are not an option.
If you have money in a 529 college savings plan for yourself or a child, you can withdraw it for any reason. However, you’ll owe income tax plus a 10% tax penalty unless you spend it on qualified educational expenses.
If student loan payments are on your current list of bills, note that, as of 2019, they count as qualified educational expenses. But see below for some new rules on federal student loans that may allow you to simply postpone payments.
Prioritize Your Bills
If you’re facing a stack of bills without a corresponding stack of cash, it’s time to prioritize. Food is likely to be high on your list. Ditto for shelter, which includes mortgage or rent payments and utility bills. On the food front, you’ll need ready cash or a debit or credit card. For shelter and certain other major expenses, though, you may have greater flexibility.
If you are a renter and are scraping by to make your next payment, you may be wondering how to keep that roof over your head. The CARES Act, states, and municipalities took steps to help renters, declaring a moratorium on evictions to help keep people in their homes.
The CDC also issued a series of bans preventing landlords from evicting affected tenants. But that moratorium was struck down by the Supreme Court. So it's important to understand what happens now that the CDC ban is no longer in place.
Consider chatting with your landlord sooner rather than later. Your landlord may be willing to delay your rent or allow you to make partial payments. Bear in mind that your landlord may also have money troubles—especially if they’re a person and not a large company.
Federal and state governments have emergency rental assistance programs available to those who qualify. In fact, $25 billion in rental assistance was included in the COVID-19 relief plan passed in December 2020. These funds are administered by the U.S. Treasury. You can look up the type of assistance offered by your state here 403.
If you have a mortgage on your home, contact your loan servicer. Many banks allow borrowers to postpone payments for a period of time or provide them with other types of relief. If your mortgage is federally backed, you may be eligible for forbearance under the CARES Act that will allow you to postpone payments for up to a year. There are also additional options for mortgage relief.
If your mortgage is backed by a government program, a moratorium on foreclosures and evictions was put into place for those impacted by the economic shifts in 2020. Keep in mind, though, that that moratorium already expired on July 31, 2021.
Mortgage Foreclosure Help
On June 24, 2021, the Biden Administration extended the foreclosure moratorium for the final time to expire on July 31, 2021. This action included:
- Mortgages backed by the U.S. Department of Agriculture (USDA), extended the foreclosure moratorium for its Single Family Housing Direct and Guaranteed loan programs
- U.S. Department of Housing and Urban Development (HUD) loans insured by the Federal Housing Administration (FHA) or guaranteed by the Office of Native American Programs (Section 184 and 184A loan guarantee programs)
- Mortgage loans from the Department of Veterans Affairs, or VA loans
However, the Department of Housing and Urban Development, Department of Veterans Affairs, and Department of Agriculture also extended the date for which borrowers can request forbearance. The mortgage payment forbearance enrollment window continues until the end of the COVID-19 national emergency.
For mortgage loans backed by Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA) stated they extended the foreclosure moratorium on real estate-owned (REO) evictions until Sept. 30, 2021. REO properties are bank-owned properties seized due to non-payment.
Please check with your mortgage service provider—or the company that receives your mortgage payments—or your lender to determine if your mortgage loan qualifies for the moratorium program.
Car Loans and Leases
If you have a car loan or lease, reach out to your lender or leasing company. Many auto companies and other lenders have emergency programs that will let you defer payments for a month or more.
Some insurers allow customers to put off paying premiums for a period of time without canceling their coverage. So check with yours to see what options are available to you. Make sure you don’t take the risk of going uninsured.
Student loan borrowers were given some reprieve because of provisions in the CARES Act. The Biden administration extended the pause on federal student loan payments and all related collection activity that were put in place through Dec. 31, 2022. This move includes a pause by the U.S. Department of Education on loan interest and collections on defaulted loans for those in the Federal Family Education Loan (FFEL) Program.
The Biden administration also promised to provide student loan debt relief of up to $20,000 for borrowers with Pell Grants from the Department of Education and as much as $10,000 for non-Pell Grant recipients.
On Nov. 11, 2022, federal courts issued orders to block the plan for student loan debt relief. The Department of Education said it was working to get the decision overturned. In the interim, it stopped accepting new applications for debt relief and held those that were already submitted. As a result, the Biden administration further extended the pause on student loan payments until either of the following dates—whichever is earlier:
- 60 days after the court's block is lifted or the forgiveness program is implemented
- 60 days after June 30, 2023
Keep in mind that these provisions only apply to federal student loans. This means if you owe money on private student loans and have trouble making payments, contact the lender or loan servicer to find out if it has a similar program or other kinds of assistance.
Check the gas, electric, water, phone, and internet providers' websites to see whether they offer any special payment plans to help you conserve cash. Many, but not all, utility companies in the U.S. voluntarily suspended shut-offs due to unpaid bills, and some state governments stepped in to force them to do so. But before you just stop paying your bill, make sure you know the likely consequences.
Making at least the minimum required payment on your credit cards and other accounts will help protect your credit score.
Protect Your Credit Rating
Now may not be the time to fret unduly about your credit score. However, there are some steps you can take to make sure it doesn’t take too big a hit. For starters, try to make at least the required minimum payments on your credit accounts and do so by their due dates.
If your mortgage lender agrees to a deferment or forbearance of your loan payments, it should not report your payments to the credit bureaus as being late. Your lender can also provide a statement that indicates you have been affected by a natural or declared disaster, which can help protect your credit history and credit scores, according to Experian, one of the three major credit bureaus.
When the Crisis Is Behind Us
You’ll need to re-prioritize once the pandemic passes and you’re back at work. In addition to abiding by whatever repayment agreements you reached with your creditors, aim to pay down any credit card balances you’ve accumulated, starting with the highest-interest ones first.
Now would also be an opportune time to start an emergency fund, or replenish your fund if you had one and depleted it. As a general rule, it’s smart to set aside at least three to six months' worth of living expenses in a liquid account, such as a bank savings account or money market mutual fund, that you can draw on as needed.
We may never see a crisis like this again (and let’s hope we don't), but having some cash at your command can be comforting in both good times and bad.