The devastating impacts of COVID-19 have been far-reaching. For most of us, the impact has largely been financial. Even those who had relatively good financial health before COVID-19 may be struggling to stay afloat.
A lot of you may be asking, “Is bankruptcy my best option?” Others may think bankruptcy is an extreme measure and not appropriate for the ‘short term problem’. Ultimately, it just depends on your specific situation.
If you have less than $10,000 in unsecured debt and your household income is unlikely to be affected moving forward, then there may be some alternatives to bankruptcy that can get you out of debt. If you have over $10,000 in unsecured debt, this may very well be the best time to get your fresh start.
Regardless, we are attorneys who operate an informational-based practice, and want to provide everyone some basic information that might help relieve your financial burdens during these times.
The CARES Act permits mortgage borrowers who are experiencing a COVID-19-related financial hardship to seek forbearance of their loan. You may be able to request an initial forbearance period up to 180 days. At the end of that 180-day period, if you are still struggling, you can then request to extend this period for an extra 180 days — adding up to 12 months maximum.
Forbearance means the lender agrees to suspend your mortgage payments without foreclosing on your property. No additional fees or penalties can be assessed for the forbearance; however, the contractual interest will continue to accrue, meaning the debt will continue to get larger. This is a remedy we are seeing a lot of people take. It may be the best option to relieve one of your largest monthly expenses in the short term.
To be eligible, your loan must be a federally-backed mortgage. Other mortgages may also be able to receive forbearance at their servicer’s discretion. However, be sure the lender is not requiring a ‘balloon payment’ once the forbearance ends; this would require you to make a lump sum payment of all missed payments at once.
Contact your mortgage company to find out if you are eligible for a forbearance.
Contact Other Creditors to Defer Payments
Although automobile creditors, credit cards, medical providers or other unsecured creditors are not required to modify payment obligations or arrangements, they may do so voluntarily. If you were not delinquent on the account before requesting a modification or deferment, the creditor is barred from negative credit reporting if you comply with the modified payment terms. If you negotiate a modification with your creditors, make sure the terms are reduced to writing and signed by both parties so there is no misunderstanding.
The CARES Act provides more favorable borrowing terms and waives some tax penalties on early withdrawal from retirement. Although this is extremely tempting, this is usually a very bad short-term plan. When you pull money out of retirement accounts like your 401(k), you are setting yourself back years. In addition, almost all funds in an IRS qualified retirement account are exempted or protected from the claims of creditors, so you’re giving up a very protected asset to pay creditors whose debt you may be able to handle with other means.
Entitlement to bankruptcy relief is largely based on your gross income earned in the six months before the filing of your case. If you had already been considering bankruptcy or other debt relief options, now might be the best time to file if your income was reduced by COVID-19.
If you do fall behind on any debt, you should prioritize your debt by first foregoing unsecured credit card and medical debt payments. Your ability to use these types of accounts may freeze when you become delinquent. However, do not get further unsecured signature loans to pay credit card or medical debt. This will just make your situation worse. It may be better to file a bankruptcy now, to ease your payment outflow, rather than trying to avoid bankruptcy or negative credit results. Very frequently, bankruptcy can actually improve your credit score (see our Bankruptcy Myths page for details).
If you have more than $10,000 of unsecured debt that you cannot pay, or you signed up for a vehicle payment that you just can’t afford anymore, it is best to contact our office to see if bankruptcy is right for you. We offer low, up-front pricing that allows you to get relief from your creditors much sooner than most other bankruptcy firms (see our Bankruptcy Costs page for details).
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Please note that our attorneys are unable to serve areas outside of Southwest Missouri.