A Guide for Surviving Unexpected Financial Hardship
Here is what we have seen works when dealing with a financial crisis
The year 2020 exemplified "unforeseen circumstances" and the value of a financial safety net.
Poet Oscar Wilde once said, "To expect the unexpected shows a thoroughly modern intellect."
Unexpected events like the COVID-19 pandemic remind many of us we may be one unexpected event away from financial turmoil.
With almost 69% of American households living paycheck-to-paycheck, it takes much less than a pandemic to push someone into economic instability.
Events like illness, job-loss or pay reduction, and even a divorce which may result in an estate being divided, could wreak havoc on a person's or family's finances.
We have seen our clients come to us with these events and more - and we are family law attorneys so we see husbands, wives, fathers and mothers with financial concerns or uncertainty. Some of them are business owners while others are normal W2 employees. Unexpected financial hardship can affect everyone.
We have also seen many of them navigate this process through proactive and diligent preparation that avoids a financial meltdown.
So, from our experience, here are some survival tips for sudden financial challenges. This is not legal or financial advice.
Ready? Let's get started.
Topics We Cover
Here are the three main topics we will cover. You can click on each image if you want to jump ahead.
Avoid short-term, high-interest loans
Approximately 12 million people in America get payday loans annually and may become vulnerable to a cycle of high-interest rates, debt, and financial vulnerability. To learn more about payday loans, check out this Wikipedia page.
Over 80% of payday loans are followed up by another loan within two weeks and have interest rates as high as 664%...yes, you read that right. Our jaws also dropped.
A failure to pay off payday loans could result in debt collection, a lowered credit score, or even a court summons.
What are the alternatives to payday loans?
There are better alternatives. Consider the following.
- Ask families and friends for financial assistance.
- Seek local funding through nonprofits, charities, and community centers.
- Sign up for a paycheck advance app.
- Join an informal lending circle. Make sure it is legitimate.
- Consider getting a personal loan from your bank.
- Tap into your 401(k) but get tax advice first.
- Negotiate a settlement or payment plan with creditors.
The alternatives are not perfect and have drawbacks
For instance, joining a lending circle typically requires consistent income and regular contributions.
However, is that not better than the $750 in fees the average person pays in payday loan fees or the 50% chance of defaulting on a loan within two years.
A proactive approach can avoid the financial disaster
No matter your station in life, a proactive approach will take you to a better place than the status quo.
Smart people learn from their mistakes. But the real sharp ones learn from the mistakes of others.
- Author Brandon Mull
Since the mid-1850s, America has experienced approximately 32 economic recessions.
What can the normal middle-class family do?
As normal middle-class families cope with the current COVID-19 recession ("what recession?" the Wall Street folks may say, right?), it is crucial to avoid mistakes from previous recessions.
For instance, according to the linked article, blogger Jaime Gibbs did not budget or prepare for a financial emergency before the 2008 recession hit. Consequently, she had to sell her boat, car, and home to keep her family afloat.
It can be tempting not to budget during financial wellness. That is when too many men and women excessively "consume" in the "consumer" sense of the word.
However, heed Gibb's advice (and it is darn good advice) to proactively create a financial plan and secure multiple income streams to cushion economic downturns and unexpected life events - like, as an example we know well, divorce.
You have to read some of the statistics in the previously linked divorce statistics page to believe it. We almost did not believe it.
Professionals can help with the planning
Professionals, such as financial advisors, certified personal accountants, or attorneys can help you prepare far in advance of a financial emergency and answer your financial questions.
For instance, an experienced financial advisor can maximize your liquid savings, reduce your monthly bills, minimize your credit card debt, and strategize about your taxes.
And if you are guessing a great divorce attorney should also answer your questions about the process ahead and help you mitigate the "attorney's fees" hit of the divorce, you guessed right.
Consider deferment or forbearance as debt relief options
Although deferment and forbearance allow a consumer to pause or reduce monthly payments, they have two significant differences: interest accrual and repayment requirements.
- Interest does not stop accruing with forbearance but may stop with deferment.
- Deferment is typically better for substantial economic hardship, while forbearance is usually better for temporary financial challenges.
- Consumers usually pay off what they owe from the forbearance period in one lump sum. With deferment, however, a consumer may gradually repay.
Some banks incorrectly use deferment and forbearance interchangeably on the COVID-19 sections of their websites.
A financial advisor, certified personal accountant, or other financial professional with experience in this area can review the debt or mortgage relief program's terms before you enroll.
A word or two about student loans
Approximately 42 million people in America have student loans.
The 2020 CARES Act gave some relief to those with federally-owned student loans by pausing all collections and wage garnishments on defaulted loans and providing a 0% interest rate.
This relief will last until September 30, 2021 - not long enough if you ask us.
The CARES Act (but did it "care" enough?)
The CARES Act may not cover private student loan borrowers. They will need to contact their bank or private lender directly to request deferment or forbearance.
Some common reasons to justify debt relief include cancer treatment, military service, and economic hardship.
We hope you enjoyed this article.
Now start that proactive planning…