There’s no denying how challenging these past few months have been for families, especially when it comes to their finances. Many have been laid off, furloughed or had their hours cut due to COVID-19, making it difficult or impossible to pay their bills. In fact, one study showed that 58% of Americans have lost income in some way. If you’re among those who cannot pay your bills, you may be considering bankruptcy as an option to resolve your debts. Today, let’s go over your debt repayment options, how bankruptcy can help, and some steps you can take to help your finances in the meantime.
What are my debt repayment options?
If your debt payments are stacking up, keep in mind that many of your debt payments may be postponed for the moment due to COVID-19. Currently, there are legal provisions in place that allow for homeowners to postpone mortgage payments for 180 days and postpone student loans for six months. Depending on your choice of bank, you may be able to defer other loans, though there is no governmental regulation for credit card debt, auto loans, or any private loans.
Keep in mind that these programs do not forgive your debt, and you will still have to pay the same amount back. For instance, if you receive mortgage forbearance, you may have additional payments tacked on to the end of your loan. You’ll want to make sure you won’t have a lump sum payment at the end of your forbearance, as this can cause intense financial distress.
Is bankruptcy the right choice?
If you’ve lost your job or been furloughed, making debt payments may be impossible now. Before you file for bankruptcy, take these considerations into account:
- Will you get your job back? If there’s a possibility your income will be restored, you may not want to jump into filing for bankruptcy. Alternatively, if you don’t expect to gain your job back, you may be more likely to need bankruptcy.
- Do you anticipate any other expenses? If you file for bankruptcy, you can’t file again for several years. If you think any other major expenses will come up in the near or immediate future, you may be better off waiting. For instance, if you do not have medical insurance and know you have a major procedure coming up, you may want to wait until after.
- What kinds of debt do you have? Bankruptcy will not clear all kinds of debt. Items like student loans and alimony will not be forgiven in bankruptcy. Bankruptcy resolves debt like medical bills, bank and credit union loans, payday loans, credit cards, car payments and utility bills. Keep this in mind before filing.
What can I do before filing?
If you’re ready to file for bankruptcy, you may need some time to get the cash ready to file. In the meantime, use these tips to best prepare your bank account for bankruptcy:
- Don’t touch investments. When you pull money out of reserves like your 401k, you’re only taking away from your future. If possible, you should avoid taking money out of retirement at all costs. If you need cash, consider pulling from savings instead.
- Don’t get extra debt. Taking on extra debt can be a red flag right before filing for bankruptcy. If the debt is determined to be unreasonable, it may not be discharged. Try to use up as much of your liquid assets as possible.
- Don’t ignore your budget. Now is the time to get serious about your budget. Take time to sit down and really work allocating your money. Try to get a segment of your money in savings so you have something to use in an emergency. If filing for bankruptcy, it’s important to have money put aside to help with court fees, so try to make that a line item in your budget.
Does COVID-19 have you ready to file for bankruptcy?
Contact Reynolds & Gold. We can help you get the financial peace of mind you need.