This is the second part of the “financial triage” series. In Part 1, we ran through some options for raising money in a short amount of time. In order to preserve your residence or your employment or to protect your flexibility for the future, your financial triage approach is to raise funds. But it may be that none of those fund-raising options discussed in Part 1 are available to you or appropriate to your situation. It may be the case that creditors are knocking on your door and you simply cannot let them in. So…
Who gets paid? Realistically, some people are going to get paid, and some people are not and that is the way it is. This is now a business decision.
Non-payment of your bills will cause your credit score to tank. As you clearly cannot afford any more debt, the inability to borrow is not actually an immediate problem. However, if you anticipate moving (perhaps as part of your longer term strategy to right the ship), landlords will pull a credit score. And some employers consider credit history as well. There will be consequences if you don’t pay your bills and they may hurt.
Refer back to what you learned in school about Maslow’s hierarchy of needs. (Or Google it.) You must keep a roof over your head, food on the table and the heat and lights turned on. Everything else is up for discussion. If you own your home and have a mortgage, I hope that your monthly payment includes property taxes and insurance. Falling behind on your property taxes is as severe as falling behind on the principal and interest payment. And insurance is likely a requirement for the mortgage. Do not put your home at risk while you are working through your crisis. Proactively — before you have missed a payment — work with your loan servicer to see if there are any arrangements that can be made to relieve your immediate stress.
For renters, the advice is much the same. Communicate with the landlord or property management company to explore options. You do have some leverage if you have been a reliable renter for a long period of time. They may not be anxious to put the apartment or house back on the market, and may prefer to work with an existing good tenant. If you must move before the lease is up, likely you will lose your security deposit. But this may be a price worth paying if it allows you to escape from an unaffordable home. You can commend yourself for having maintained the flexibility that has enabled you to be able to make that choice.
You may say that you cannot possibly live without your vehicle. I hear you. But I also want you to know that life may present you with the opportunity to challenge that assumption. You can miss as few as one or two payments and lose your car to the repo man (or woman). If you must have your vehicle in order to get to work, then this must be a priority debt. But if losing the car is an eventual reality, you will be better placed if you give it up voluntarily rather than wait for it to be taken from you.
You could trade the car in for a less expensive vehicle and a new, lower loan payment with an extended term (assuming your credit has not yet taken a hit). The downside here is that you will likely be immediately “upside down” i.e. your new loan is not just for the new car, but includes the remnants of the old loan that was not paid off by the residual value of the old car (because cars are a depreciating asset). Bottom line: you are financially worse off. So again, are you completely certain that you must have the vehicle in order to keep your job? Because that is probably the only reason why you should.
Do you have fans like Wille Nelson has who will buy your album to keep you out of jail for non-payment of taxes? No? If you cannot pay your taxes, contact the IRS immediately and get on a payment plan. There are a lot of ads out there for people who say that they can negotiate down your IRS debt…for a hefty fee. Yes, the IRS will often settle for less but you do not need to hire someone to do your bidding. If you feel that part of the problem is the result of error and you do not feel confident in your ability to resolve it on your own, are you able to access free legal aid in your community? (There may be income limits.)
Your Student Loans
If you have federal student loans, these payments go to the top of the queue. Why is paying student loans a high priority? Because if you do not pay, your wages will be garnished. There is no scenario where that will not cause you both immediate and lasting pain. Alternatively, the government can seize your tax refund for payment or even a portion of your Social Security payment. The good news is that if you have federal student loans, there are multiple options for putting your payments on pause temporarily. Yes, it comes with a cost; interest will usually continue to accrue and you will be left with a larger loan balance when you resume payments. But deferment will keep you in good graces as a borrower. If you have federal loans and are experiencing problems, there is no good reason why it should ever go as far as garnishment.
For private student loans, the calculus is a bit different. On the one hand, your options for deferral are limited and possibly non-existent as it is up to each individual lender; you have no right to a deferral. On the other hand, private student loan lenders cannot seize federal payments that are owed to you and cannot garnish wages without going to court. Contact your lender and see what arrangements can be made.
Your Credit Cards and Medical Debt
What these two things have in common is that they are unsecured debt. So while not paying will definitely be unpleasant, and will wreck your credit score (which you may or may not care about), the consequence of not paying will not result in the loss of your home or food on your table. First, and you see that this is a recurring theme, take control of the situation proactively. Contact your creditors and let them know that you are unable to pay. See if you can agree to a mutually satisfactory payment plan that will keep the debt from going into collection i.e. handed over to an outside credit collection agency. For medical debt, you may be able to negotiate down the amount owed considerably.
But if your debt does go to collection, know your rights. Under the Fair Debt Collection Practices Act (FDCPA), collection agencies cannot harass you in all manner of ways. They cannot call you in the dead of night, hound you at work, use threats or obscenities, or make false statements about the debt you owe. You do have power. If you have been treated inappropriately by a bill collector, send a “cease letter” demanding that they stop. Federal law requires that collectors cease contact with you after receiving such a letter. You can learn more about your rights under the FDCPA here.
To revisit Part 1 go here, Part 3 will post on August 17th.