THE BROKEN WALLET

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If you’re responsible with money you’re probably thinking, this post doesn’t apply to me—and maybe you’re right.

But let’s be honest, being responsible doesn’t make anyone immune to financial hardships. 

It doesn’t matter what we do for a living, I’m a firm believer that there’s no such thing as true financial security, and it only takes one illness, injury, economic downturn (or pandemic) to flip our finances upside down. And depending on how long it takes to find work, you might burn through your emergency funds in a matter of months.

This is a scary place to be, especially if you’ve always been responsible with money and credit. But don’t panic. 

Now, of course, the first thing to do when you can’t pay your bills is cut variable expenses. This includes reducing how much you spend on groceries, entertainment, shopping, recreation, and so forth. This post assumes that you’ve already taken this step, so we’re going to focus on what else you can do.

If you believe a hardship will continue into the future, downsizing your housing and driving a cheaper car can help. But while this might be in your plans, these moves take time. Here’s what you can do in the meantime:

1. Don’t ignore bills

The worst thing you can do is ignore a bill you can’t pay. Ignoring the expense doesn’t make it go away, nor does it help your situation. You’re actually making your problem worse. 

Creditors will send late payments, charge late fees, and eventually send your account to collections.

You can’t change your situation, but you can change how you handle it. So as bills come in, give your creditors a call. 

Some people make the mistake of hiding from creditors—because they don’t want a lecture. But right now, the opinion of a representative isn’t priority. The top priority is keeping your account in good standing. 

The good news is that many mortgage companies, banks, credit card companies, and even utility companies will work with customers impacted by a hardship.

When you call creditors, explain what’s going on. They might reduce your monthly payment, suspend your payment temporarily, or offer a payment extension. Help is available, but you have to ask for it.

2. Prioritize bills

It’s also important to prioritize expenses. If you’re unable to pay everything by their due dates, pay your most important bills first. 

As a general rule of thumb, housing takes priority because you need a roof over your head. You also want to prioritize any house-related expenses like electricity, gas, and water, as well as other essentials like food and insurance payments.

Once you have your housing and other essential expenses covered, it’s time to pay your secured debts. This is any type of debt backed by collateral or an asset. 

One type of secured debt is an auto loan, but can also include home equity loans since these loans use your home as collateral. 

Now, if you have a car loan, I know for a fact that some auto finance companies allow a certain number of “skip payment” options.

If you qualify, you can skip your payment without penalty, and without a negative ding to your credit report. Use this option if you can’t make the payment.

The next step is to prioritize unsecured debt. The biggest unsecured debt you probably have is credit card debt. So make a list of all your credit cards, their minimum payments, and due dates, and then pay as many as you can. If you can’t pay all of them, pay the ones with the lowest minimum payments first. 

As a personal finance writer, I have to take a moment to stress the importance of not getting into large credit card debt in the first place. Credit cards are useful when used responsibly. This involves charging only what you can afford and paying off your balances in full every month. 

Not only does this prevent long-term debt and high interest, it’s easier to keep your head above water when you don’t have unnecessary debt. 

If you have balances, aim to pay at least your minimums by their due dates to keep your accounts in good standing. If you can’t pay your minimum, call your credit card companies and explain your hardship.

Fortunately, late payments aren’t reported to the credit bureaus until you’re 30 days past due. So if you can’t pay by your due date, yet you’re able to pay within the 30-day window, you’ll avoid a negative mark on your credit report. You might get hit with a late fee, though.

Also, if you have a credit card with a rewards program, check your rewards balance. You might have enough points to redeem for statement credit.

3. Postpone student loan repayment

(***As of August 2022, there’s still a pause on federal student loan repayment***)

If you have federal student debt, which is a loan backed by the federal government, this is the easiest type of debt to manage during a hardship.

Federal student loan providers have a provision—known as forbearance—that allows you to stop making your payments temporarily. Due to the pandemic, federal student loan payments have been placed on pause. But forbearance comes in handy during other times of crisis too. 

You can receive forbearance for up to several months. During this time you don’t pay late fees, plus skipping a payment doesn’t affect your credit score. Typically, interest continues to accrue (it doesn’t under COVID relief plans).

Private student loans, unfortunately, are a different ballgame. These lenders may or may not offer forbearance, but it doesn’t hurt to call and discuss your options. 

4. Get an employer cash advance

Some people might consider getting a payday or cash advance loan for immediate cash, but these loans aren’t cheap and involve high fees. 

A better option: Speak with your employer and ask about an advance on your next paycheck. 

Now, this isn’t a solution to an ongoing hardship. But it might work if you can’t postpone an unexpected bill until payday.