If you’re one of the millions of Americans who’ve 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. To manage your finances until the crisis has passed and you’re back on the job, it helps to have a plan. Here’s some advice on how to pay your bills—and when you may be able to postpone paying them.
- If cash is in short supply, a credit card or checking account line of credit can help in the short term.
- You may be able to put off paying some bills, such as rent, mortgage payments, and insurance premiums if you check with your creditors.
- 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.
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 might 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 are now allowing customers to defer payments while also 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 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 from a 401(k): loans and withdrawals. Each has pros and cons.
- 401(k) loans: Normally, you can borrow money from your 401(k) and pay it back over a specified number of years (typically five). The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, 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 be growing tax-deferred. And if you’re unable to repay it 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 did waive the 10% penalty for withdrawals made in 2020 if you were under the age of 59½. Also, you must repay the 2020 withdrawal over the next three years and the money won’t be there for you when you retire and might really need it.
Note that if you have money in an 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 2017, they now 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 rent and are scraping to make your next payment, talk with your landlord sooner rather than later and see if you can put off paying or make a reduced payment. Bear in mind, of course, that your landlord, especially if they’re just an ordinary person and not a big company, may be having money troubles, too. Note also the CARES Act as well as many states and municipalities have declared a moratorium on evictions, so don’t hesitate to invoke your rights if it comes to that.
If you have a mortgage on your home, contact your loan servicer. Many banks are allowing their mortgage holders to postpone payments for a period of time or providing 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 has been put into place for those impacted by COVID-19. The moratorium was due to expire on Jan. 31, 2021, but was extended. However, the extension expiration dates vary, depending on the government agency that is backing the mortgage loan.
Mortgage Foreclosure Help Due to COVID-19
For mortgage loans backed by Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA) stated they have extended the foreclosure moratoriums on single-family foreclosures and real estate owned (REO) evictions until Mar. 31, 2021. REO properties (real estate owned) are bank-owned properties seized due to nonpayment.
For mortgages backed by the U.S. Department of Agriculture (USDA), the USDA has extended the foreclosure moratorium for its Single-Family Housing Direct and Guaranteed loan program until June 30, 2021.
The U.S. Department of Housing and Urban Development (HUD) insured by the Federal Housing Administration (FHA) or guaranteed by the Office of Native American Programs’ (Section 184 and 184 A loan guarantee programs) were extended through June 30, 2021.
Mortgage loans from the Department of Veteran Affairs, or VA loans, also got a reprieve from eviction and foreclosure until June 30, 2021. 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 will continue until June 30, 2021.
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
Similarly, 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 are allowing customers to put off paying premiums for a period of time without canceling their coverage. So check with yours (but don’t take the risk of going uninsured).
Because of another provision of the CARES Act, borrowers with federal student loans are not required to make payments on them until Sept. 30, 2021, according to the Consumer Financial Protection Bureau. On March 30, 2021, the U.S. Department of Education also extended the pause on loan interest and collections on defaulted loans to those in the Federal Family Education Loan (FFEL) Program. If you owe money on private student loans that aren't within this program and are having trouble making payments, contact the lender or loan servicer to find out if it has a similar program or other kinds of assistance.
As to gas, electric, water, phone, and Internet bills, check the provider’s website to see whether it offers any special payment plans to help you conserve cash. Many, but not all, utility companies in the U.S. have voluntarily suspended shut-offs due to unpaid bills, and some state governments have 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.