By JOHN MANOCCHIO | Moonshine Ink
Better days are before us; in that I am fully confident. However, this pandemic has forced many to take extreme financial measures and will continue to have impacts for some time to come. Having a plan to financially recover from hits to your wallet during lockdown may provide that all important “light at the end of the tunnel.”
It is no secret, as a result of the COVID-19 outbreak, many have seen incomes reduced, work hours cut, or worse, a job loss. The economic strain has been especially acute in our mountain community that relies on leisure travel with nonessential movement shut down.
In response, the state and federal governments expanded benefits available to those impacted by COVID-19, yet the programs are temporary, and for some, won’t make up the income lost. Because of this, individuals have taken other measures to make ends meet. Some have made use of credit cards or other types of personal credit, some have dipped into retirement savings, some have delayed the payment of debts through a forbearance, and for those lucky enough to have it, some have spent down savings.
For individuals who have had to make use of one of these measures to close near-term income gaps, be mindful of a few important tips as we begin to return to normal and the situation hopefully continues to subside.
First, think about taking the extra time necessary to return to your prior financial situation. Granted, after months of belt-tightening, it’s not fun to think about continuing that way. Keep in mind, it is only temporary and if you continue to scrimp and save as you get back on your feet, your future self will thank you.
Credit cards can carry a very high interest rate and by making just the minimum payment, or close to it, it can take years to pay them off. If there is more than one credit card with a balance, one strategy that works well is to pay off the smallest balance card first. This system emotionally rewards this type of progress and it can help build momentum in paying down other debts. The thinking goes, the smallest balance is paid off first, so that payment amount can be added to the payment of the next card. Do everything within your power to avoid a chargeoff of the debt, which is a declaration by a creditor that an amount of debt is unlikely to be collected. This can negatively impact your credit score, and keeping your credit in good standing should be a primary objective. What’s more, a chargeoff does not automatically make the debt go away and there could be tax consequences.
When the CARES Act was signed into law at the end of March, it included a provision that allows us to dip into retirement savings accounts prematurely. Typically, if we take a withdrawal from a retirement account before we turn 59 and a half there is an early withdrawal penalty of 10% from the IRS; California also has a 2.5% penalty. The CARES Act has effectively waived that penalty if you have been impacted by COVID-19. What hasn’t been waived is the income tax due on the withdrawal, however, Congress is allowing us to pay any taxes due over a three-year period. More importantly, the act allows the withdrawal amount to be put back into the account within a three-year period.
You may have requested a forbearance or delay on student loan payments during the stay-at-home order. If you have a federally-held student loan, your payments have automatically been suspended by your loan servicer for the period of March 13, 2020 to September 30, 2020. This was done to offer temporary economic relief. However, if you are in a position to continue making payments, it could be beneficial to continue doing so. The suspension of the payments does not forgive the payments; rather, it likely adds them to the end of the loan period. Perhaps more importantly, the interest rate is set to 0% during the March to September time period. This means your payment goes completely to principal which could ultimately help pay off your loan more quickly.
If you have had trouble making a mortgage payment, requesting a forbearance may offer temporary relief. Unlike a student loan forbearance, this is not automatic and a formal request must be submitted to your loan servicer. For federally backed mortgages, the CARES Act includes provisions to make this request. For non-government-backed loans, any forbearance availability will be dependent upon the loan servicer’s requirements. If you are able, the best course of action is to continue making mortgage payments. However, if a forbearance must be requested, it is important to know how your loan servicer treats the suspended payments. As with student loans, the suspended payments are not forgiven but will be due at some point in the future, and any payment plan for those back-mortgage payments is up to the servicer.
Lastly, if you have had to request a forbearance for either a student loan or a mortgage, it is important to keep an eye on your credit report. Under the CARES Act, student loans and mortgages in forbearance are not to be reported negatively to the credit bureaus. Such reporting would have a negative impact on credit history and credit scores. A good practice is to get verbal confirmation from the lender that such negative reporting will not happen and then keep an eye on your credit report. If a negative report does occur, file a dispute to get the reporting reversed.
It is going to take time for both our economy and community to return to the pre-COVID days of just a few months ago. As life begins to swing back to normal, it might be helpful to keep our belts tight for a bit longer until our finances swing back also. It is only temporary. Better days are coming.