We are living in strange times. With the worldwide efforts to stop the spread of the Coronavirus / COVID-19, we are seeing most schools and large events being canceled. There are even discussions of shutting down all non-essential services throughout the United States.
These actions may be necessary to deal with the virus, but there are significant financial consequences to families as it relates to being able to pay for their monthly expenses and making payments on debt like car payments, house payments, credit cards, medical bills, etc.
In a study often cited by Dave Ramsey, approximately 78% of Americans are living paycheck to paycheck. This means that any change in pay – even a temporary reduction – is going to cause a lot of problems for most American families.
Anytime the bills aren’t being paid there is a lot of stress and anxiety. In this article, I wanted to discuss a few things to consider if you are facing unpaid bills and what you should focus on when it comes to your financial obligations during this uncertain time.
Focus on Utilities, Rent, and Secured Debts Like Car Loans and Home Loans
If you are in a situation where your income is lower due to reduced hours at work or even a lay-off you may find yourself in a situation where you are having to pick and choose what bills to pay.
My general advice is to focus on paying bills where a service will be shut off or an asset repossessed.
Utilities – SRP Announces No Shut Off of Power and Waiving of Late Fees
Keeping the lights on, the water running, and gas for the stove is a priority – especially if the rumored shut down occurs. Before you pay credit cards, medical bills, or other unsecured debts you need to pay your utility bills. If you don’t have enough money to pay all of the bill, contact the utiliy and see what they can do to assist you.
Here in Arizona SRP has already announced that they will not be shutting off anyone’s power for non-payment at this time and will be waiving all late payment fees. If you are struggling to make a payment on any of your utilities communication is key. Rarely will you lose power, water, or any other utility if you are communicating with them about your situation.
Car Loans and Homes Loans
When your debt is secured by an asset like a car or a home the debt is considered “secured”. If you can’t make your car payment you risk having your car repossessed. If you can’t make your house payment you risk your home being foreclosed on. Because there are real work consequences for not paying these debts, i.e. you could lose your car or house, they are important debts to focus on.
If you are struggling to make a car payment or a mortgage payment it is important to communicate with your lender. As with utilities, if you are in communication with the lender it is rare that they will take drastic action to repossess your car or start foreclosure on your home for a temporary problem. They want you to keep paying on your loan. The bank loses money when they repossess your car or foreclose on your home. Communicate with them and they will almost always be able to work with you on a temporary basis.
Many times when I meet with families who are facing financial difficulty they are concerned as to how quickly creditors will take action against them.
It can help you sleep at night to know the facts and the law on repossession and foreclosure.
If you fall behind on your car payment the bank or lender can repossess your car, sell it, and pay off the loan that you owe on it. If the bank doesn’t receive enough money from the sale of your vehicle they can come after you for the balance still owed. This balance is called the deficiency.
Most car lenders do not pursue repossession until you fall behind 3 to 4 months on your monthly car payments.
It is important to note, if you miss even one car payment you can be considered in default and the bank has the right to repossess the vehicle. But, as I mentioned above, the bank does not want to repossess your car. And so in most cases, they won’t take that action unless you miss 3 or more payments. An exception to this general rule is when you purchased a car through a “by-here-pay-here” place. Those loans are more high risk and are often run by companies that are extremely aggressive and will often repossess a vehicle for being even a few days late on a monthly payment.
If you are able, make your car payments before you devote any money to credit card debts, medical bills, and similar unsecured debts. If you can’t make the payment for a month or two, reach out to the lender and see what they can do to help.
The thought of losing your home can cause a lot of anxiety. The good news is that the foreclosure process is very slow in Arizona and if you are behind on your house payment you will have time to work with your lender to bring things current. Typically banks do not begin the actual foreclosure process until you fall behind at least four payments. Under Arizona law, if they want to foreclose on your house they must provide you notice in the form of a “Notice of Trustee’s Sale” that must be mailed and posted on your door.
Arizona law further provides that the soonest they can actually foreclose on your house is ninety (90) days from the day they posted the Notice of Trustee’s Sale on your door.
For example, if your bank posted a Notice of Trustee’s Sale on your door today (March 16, 2020), then the soonest they could foreclose on your house would be June 14, 2020 (ninety days from today). During that time you can bring the payments current, work out a plan with your mortgage lender, or even apply for a loan modification to make your house payment more affordable. If none of those options are available, or if your foreclosure is imminent, you can even file a Chapter 13 bankruptcy to stop the foreclosure process and bring your past-due mortgage payments current.
With both home loans and car loans, it is important to keep these loans current. If you can’t do that then communication with your bank or lender is the key to keeping your assets and keeping the loan on track.
Credit Cards, Medical Bills, And Other Unsecured Debts
Most credit cards, medical bills, and personal loans are unsecured. This means that there is no collateral or property securing the loan.
This also means that if you can’t pay your credit card they can’t take anything from you unless they sue you, obtain a judgment against you, and then try and garnish your wages or bank account.
Often when people experience financial difficulties I will see them prioritize paying their credit cards over their utilities and secured debts. This is usually because the unsecured creditors are the most aggressive and loud. They call you non-stop and sometimes even make threats.
Unsecured creditors tend to be the loudest and annoying because that is all they can really do if payment is not made. They can’t take your car. They can’t take your house. They can ding your credit score, but they can’t even garnishment your wages or bank account unless they first sue you and obtain a judgment against you.
Most credit card companies will do either internal collections or hire a collection agency and attempt to get payment over a period of six months. After that, most of them charge-off the account, package it up and sell it to a junk debt buyer. Even if a junk debt buyer purchases your account most do not file a lawsuit for a year or two after it is sold.
While your credit score will take a hit, if you are having to prioritize which debts you pay, the credit cards should come last. With this national pandemic, they may be willing to work with you. Before you stop paying your credit cards I would contact your credit card company and see what options they have to assist you during this difficult time.
What About Student Loans?
Student loans are usually not secured by any type of asset and fall into the unsecured category. However, student loans are different than most other unsecured debts in that they have special protections and are usually not eliminated in bankruptcy.
Federal student loans can be deferred for a period of time where you will not be required to make a payment. Currently, there are proposals by President Trump to eliminate interest on student loan debt during this pandemic.
Navient has put out a statement but at this early date, it does not appear that the specifics of how this will work have been made public yet.
If you are not in a position to make your student loan payment, call your lender and ask them about a deferment of the loan until you are in a better position to make those payments.
Don’t Panic. Over Communicate With Your Creditors
The important thing is not to panic when it comes to your finances during this time.
Focus on the essentials – utilities, rent, and secured debts. If you can’t make any payments, including credit cards and student loans, communicate with your creditors. The more you communicate with them the better off you will be in the long run.
If you have specific questions as to your situation I am happy to help. You can schedule a consultation online by clicking here, or give us a call at (480) 420-4028 and we can find a date and time that works best for you.
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John Skiba, Esq.
We offer a free consultation to discuss your debt problem and help you put together a game plan to eliminate your debt once and for all. Give us a call at (480) 420-4028