Developing A Health Crisis Game Plan For Your Finances  

 

Summary

 The Health Crisis is causing many people financial distress. 

The CARES Act is giving relief by giving consumers and business owners stimulus as well as giving providing options for things like your Mortgage, Eviction Moratoriums, Student Loan Deferment, etc. 

Creditors are being proactive and lenient with their consumers. 

Now is the time to put together a plan for understanding your options.

 

Initial Thoughts 

I’ve been dealing with creditor issues for well over a decade.  When you deal with an issue like the current health crisis, you realize that the whole world revolves around a sea of debt.  You have a creditor, your creditor has a creditor, and that creditor has a creditor.  It’s like the Lion King, a metaphorical a circle of life (except literally a circle of debt). 

The solution would be to put everything on hold and have a mentality of the next business day being months away.  In my opinion, that is what the Government, and to a certain extent the private sector, are trying to do. Keep in mind that the situation is fluid and changing.  Your go to action for any type of issue is to contact your lender.  Below is a summary of what government programs and the private sector are doing to help. 

As you read on – keep in mind that I file Bankruptcy cases for a living.  Bankruptcy is a consumer protection that we have ALWAYS had.  I don’t want anyone to have to file a Bankruptcy case.  I’m writing this article to give perspective about your options and understanding and that Bankruptcy is an option. 

What is the Government Doing? 

In late March, the stimulus package was passed into law under the name The CARES Act (Corona Virus Aid, Relief, and Economic Stimulus).  This bill is meant to act as a bridge to get businesses and everyday people to the end of this health crisis.  The following is by no means comprehensive on everything the CARES Act entails.  Rather, this addresses the most relevant issues I see for everyday people.  

Stimulus Checks — the treasury will be sending out stimulus checks to help.  If you made less than $75,000 in 2019, you will be eligible for the full payment of $1,200. Couples who filed jointly and made less than $150,000 will get $2,400. An individual who filed as “head of household” and earned $112,500 or less gets $1,200. 

For every eligible dependent child in the household, you will receive an additional $500. 

If you made more than $75,000 (or $150,000 for married), your payment will be reduced by $5 for every $100 of income that exceeds the limits.  

  • You can find out when your stimulus money will arrive,  HERE.
  • You can calculate the amount of stimulus money and other FAQs,  HERE.
  • If you filed a tax return in 2018 or 2019 OR receive some type of Social Security, then no further action is required.  If that does not apply to you, you can let the IRS know in order to receive your stimulus money.  You can do that,  HERE.

Unemployment — Unemployment is normally a function of state law.  However, under the CARES Act the federal government is stepping in to strengthen these unemployment benefits.   The CARES Act does the following: 

  • Increases weekly payments by $600 per week.  The maximum payment in Texas is $456 per week.  Thus, it could more double the weekly benefit. 
  • This additional payment would last up to 4 months  (until the end of July).
  • Extends state benefits an additional 13 weeks.  Texas unemployment is 26 weeks.  Thus, it can go up to 39 weeks, which is essentially to the end of 2020.
  • Extends unemployment benefits to people who would not otherwise be eligible (self -employed, part time, freelancer, etc) so long as they can show that their unemployment is related to the Coronavirus outbreak. 
  • You apply for Texas Unemployment HERE. 

Small Business Loans — The Cares Act is giving direct loans to small businesses with less than 500 employees.  The goals of this is to provide relief for small business to stay in business and make sure that they retain their employees (Payroll Protection Plan).  Here are some details: 

  • Loans all have the same terms, have no personal guaranties, and can be forgiven under certain circumstances (like making sure you don’t lay off your employees).  
  • The loan provides up to 2 months of payroll cost plus an additional 25% of the payroll amount which is to be used for rent, mortgage, utilities, and other business expenses. 
  • Maximum loan amount is $10 million. 
  • Details of the program come directly from the US Treasury and can be found HERE. 
  • The application itself can be found HERE.   *Most lenders are now doing this application through an online portal.

 Rent  The CARES Act bans evicting renters living in single-family and multifamily properties financed by federally backed mortgages (i.e., by Fannie, Freddie, and Department of Urban and Housing Development [HUD] loans) and renters living in federally assisted housing.  More information on this can be found HERE.  

  • It is estimated that this covers about 25% of rental units in the United States. 
  • In addition, the State of Texas Supreme Court has issued a state wide moratorium banning eviction hearings until April 20,2020. You can find a copy of the court order  HERE  
  • The problems I see in this are: 
    • What about late fees that are incurred? 
    • Landlord(s) still sending out notice to vacate (different than an eviction) and engaging in threatening behavior. 
    • How do you know if your property is covered under the CARES Act? 

Mortgage Payments — Homeowners with a federally backed loan (FHA) would be allowed to request a forbearance of 180 days.  You could request an additional 180 days, if needed.  There will also be a moratorium on foreclosures for 60 days starting March 18, 2020, only for federally backed loans. 

  • Keep in mind the definition of a forbearance.  A forbearance is when you don’t make the payment for a period of time.  However, you are required to pay that amount or come up with an agreement to pay it after the forbearance period is over.  This is different than a deferment.  In a deferment the payments you miss are put at the end of the note. 
  • Under no option is the payment forgiven – you always have to pay it back one way or another. 
  • A great article covering this issue can be found HERE

Student Loans — Federal Student Loan interest is set at 0% with no payments due for the next 6 months.  This initiative is backdated to start from March 13, 2020.  In addition, no collection activity can take place for Federal Student Loans.  This means no garnishment from paychecks, social security, or tax refunds.  Any collection activity that took place after March 13, 2020 will be reversed and the borrower issued a refund. 

  • Be careful as this only covers loans that are backed by the federal government and not private student loans.  You need to figure out if your loan is federal or private since some companies service both federal and private student loans.
    • You can find more info on that HERE.  
    • You should make the payment if you can.  Your balance will go down faster since there is a 0% interest. 

What Are Will Creditors Offering?

It is my belief that companies and credit companies know that they will be judged by how they treat people during the health crisis, therefore, they seem to be proactive and are giving their clients many options.

Mortgage Payments — mortgage companies were offering forbearance on their own and possibly deferred payments.  I fully expect mortgage companies official policy to just fall in line with the federal legislation now that it has been passed. 

Car Payments — many of my current clients have contacted me saying that their auto lender has reached out to them and offered to defer payments, thus, this is probably an option for most people.  Reach out to your car lender to see your options.  Keep in mind that a deferment basically moves the payment to the end of the term. 

Credit Cards and Unsecured Loans —Lenders are offering options for a reduced and deferred payments.  Issues to ask about when doing this are: 

  • How will this be reported to the credit reporting agencies? 
  • Changes in my interest rate? 
  • Will I still be able to use my credit card? 

Collection Agencies — business as usual for them as far as I can tell.  Creditor contact has gone down a bit due to stay at home orders.  When people go back to work I fully expect collection agencies to be in full swing – including filing lawsuits for severely overdue accounts.  

 

What About Bankruptcy?

Bankruptcy filings will go up as a result of the health crisis.  However, we are in an interesting time where lenders are being lenient with their clients.  In addition, people are at home and generally have more time to be thinking about these issues.  I encourage people to do that.  Look at your options, talk to a professional, and put a plan together.  Below are some basic principles and/or misconceptions about filing for Bankruptcy. 

Consumers generally file a Chapter 7 or Chapter 13.

  • Chapter 7 cases discharge your eligible unsecured debt with no form of repayment (credit cards, medical bills, unsecured loans, etc).  Things like student loans, income tax, and domestic support obligations are not discharged.
    • To be eligible for Chapter 7 you must pass a “means” test.  The means test determines whether or not you have the “means” to pay back your creditors.  You can read more about the means test HERE.
    • Chapter 7 allows you to keep your exempt property for your fresh start.  Your non-exempt property is sold and distributed to your creditors.
      • Most people in Chapter 7 keep all their assets, including their house and vehicles.
      • You can read more about exemptions HERE and HERE.

 

  • Chapter 13  cases are a plan or reorganization where you create a plan to pay creditors over a period of 36 to 60 months.  The Chapter 13 plan allows you to:
    • reduce what you pay to your unsecured creditors (if you aren’t eligible for Chapter 7 the same test essentially determines your payment to unsecured creditors in Chapter 13).
    • Pay back mortgage arrears (what you are behind in payments).  This will be a good option for people after their forbearance period is over.
    • Restructure your car loans.
    • Pay back the IRS at 0% interest and no penalties.
  • When you file either chapter there is an automatic stay in place.  This is an injunction where creditors can no longer engage in any collection activity.  No phone calls, letters, lawsuits, statements, etc.  Everything moves inside the Bankruptcy system. 
    • You can read more about the automatic stay HERE.
  • You are not ruined by filing either from of Bankruptcy.  It shows up on your credit report that it happened.  However, most people are about 90% recovered two years following their discharge date.    
    • You can read more about Bankruptcy and your credit  HERE.

Final Thoughts

I’ve already been contacted by many people affected by this health crisis.  Many more will follow.  This is the time to figure out your options.  I’m doing 30 minute phone calls and Zoom video consultations as I work from home.  You can set your own appointment time by following the blue “Schedule Consultation” button on the lower left.  You can also call our main line at 972-516-4255.  This is a free and confidential consultation free from judgment to better understand your options.

Written by William Collins

Partner at Collins & Arnove