After Bankruptcy: Dealing with Financial Crisis
Most people who have been through bankruptcy do everything possible to avoid financial problems in the future. But despite one's best efforts and intentions, an unexpected financial crisis can occur in the future. Until the next update to our Financial Victory video, this section is to provide you with strategies to avoid going into debt if you should have an unexpected financial crisis, and to identify ways of seeking advice or assistance from public and private service agencies in such a crisis. After all, knowledge is power.
In the video you just watched, you learned about periodic expenses, emergency funds, insurance, and short-term versus intermediate or long-term savings. All of these topics also illustrate ways to avoid having a future financial crisis, as follows:
- Periodic Expenses are sometimes called "emergency" expenses, because they come up infrequently. But if an expense is foreseeable, it can be accounted for in a spending plan and therefore need not become an emergency. Examples include budgeting an amount toward inevitable dental work, home repairs and replacements, vehicle repair and replacement, etc.
- Emergency Funds support you and prevent you from having to borrow or dip into retirement savings if you should lose your source of income for any reason. Typical advice used to be to have 3 to 6 months' worth of living expenses in an emergency fund. Since the recession in 2008, many advise that 8 to 12 months' worth is a better goal.
- Insurance is vital to avoiding debt and savings depletion for many situations such as natural disaster (fire, hurricane, tornado, flood, etc.), disability that prevents work, health problems, vehicle loss, theft, etc. If you have pets that you would 'do anything' for, pet insurance may be a valuable option.
- Certain periodic expenses can be alternatively classified as intermediate or long-term financial (savings) goals. Saving toward roof replacement on a home, for a replacement vehicle to be purchased with cash instead of a loan and for a child's education are a few examples.
If you do find yourself in a financial crisis down the road, you should seek out and examine all other options before resorting to borrowing and incurring debt. Borrowing from a retirement account is also a form of debt since you are essentially "mortgaging your future." Look at tax consequences and penalties and explore other options before doing this. In a crisis, it's human nature to be tempted by the first solution that seems easy and quick. Avoid making your situation worse (bad forms of debt or quick-fix schemes) before you have looked at all possible options for dealing with the emergency without debt!
This section illustrates general types of debt-avoidance strategies. Which of these strategies will make sense will depend on your individual circumstances and the type of financial emergency you face. You should pursue as many different strategies as you can and don't make the mistake of "counting on" one solution (i.e., new job or refinance 'around the corner') as things may fall through. Always have a "Plan B" and a Plan C and D and so on, whenever possible.
Possible Duration of the Emergency
A preliminary consideration should be whether, realistically, your financial emergency is temporary, permanent or unknown. In most cases, it will be unknown. For instance, if you lose your job, you may believe you will quickly become re-employed, but you cannot know this for certain. In such cases, you'll want to plan for the worst case. On the other hand, if you simply have to make ends meet until insurance proceeds are received or a court ordered payment is made, you can be fairly confident that your situation is temporary. Getting disability and other benefits or settlements can take much longer than most people realize so be sure to get professional advice on a realistic time-frame. Considering the possible duration of your financial problem is a helpful reality check as you look at your options.
Debt-Avoidance Strategies for Dealing with a Financial Emergency
- Can you call upon or borrow from family or friends? No one likes to be in the position of asking others for help, especially financial help, but this is almost always better than going into high-interest debt.
- Don't wait to downsize! Don't wait to take all possible actions before exhausting your emergency funds, since this is a common mistake. Here are some things to look at immediately:
- Emergency budget. If your household income goes down, immediately make an "emergency spending plan." This should reflect cutting all discretionary spending and reducing variable expenses as much as possible. A common mistake is to continue eating out and other non-essential spending until circumstances become dire.
- Major expense reduction for housing. Housing is the single biggest monthly payment for most people. If your housing payment has become unaffordable under your current income, seek affordable housing (or a temporary move-in with family or friends) while you pursue all options to cut your current housing payment.
- If you rent, talk to your leasing company or landlord and see what arrangements can be made to rent a less expensive unit or get out of your lease early so you can move to a less expensive complex or move in with family.
- If you have a mortgage, strongly consider immediately listing your home for sale since it may take many months to even get an offer. If your income situation later improves, you can always take the house off the market. At the same time, talk to your lender and/or a housing counselor about possible mortgage forbearance or other mortgage assistance. (See "Mortgage Assistance" below). If you've lost your income entirely look into unemployment forbearance programs right away. You might also consider renting out your home or a portion of it.
- Major expense reduction for vehicle or other secured payment. Remember you cannot "sell" a vehicle or other collateral for a secured debt unless you pay off the debt owed on it. And "turning in" a vehicle or other collateral to your lender will only result in a deficiency debt. However, if you plan ahead, you may be able to get out from under a large vehicle payment, expensive vehicle lease or other secured purchase contract (boat, RV, motorcycle, etc.). The key is to find someone willing to pay at least the amount owed under your contract. There are now a few online companies that allow you to list a vehicle lease for "sale." Of course, if the secured debt is for needed transportation, you'll have to arrange for a less expensive means of getting around.
Debt-Avoidance Strategies for Financial Emergencies (continued)
- What can your creditors do for you? Certain hardships may qualify you for help and concessions from your creditors- for example: Hardship forbearance, deferment, or income-based repayment plan for student loans. Creditors often offer special concessions to victims of natural disasters, and deployed military personnel. No matter what your situation, it's a good idea to talk to a supervisor and find out what types of help may be available.
- Mortgage Assistance – There are numerous programs for mortgage assistance and the programs continue to change over time. In general, there are:
Because mortgage programs change and new programs start while old programs expire, the best way to find all programs for your situation is to consult with a Housing Counselor (generally free to you) and to search online using both general queries (i.e. "mortgage assistance programs," "mortgage grant programs," "mortgage emergency programs") and more specific queries including your state and loan type (i.e. FHA, Freddie Mac, HUD, VA, etc.)
- Is there assistance specifically for your particular emergency? For instance, in the case of an apartment fire, the Red Cross typically provides emergency shelter, clothing, etc. Upon the death of a family member, the airlines offer reduced bereavement airfares for funeral related travel.
- Is there assistance specifically for you as a member of a group? By law, active duty military members (and their families in most cases) have special options in many financial circumstances. Credit Unions often have mortgage assistance and other programs for their members and seniors are often eligible for specific financial help such as property tax waiver, Affordable Senior housing, and meal delivery programs.
- Seek all available sources of assistance to reduce or defray your expenses. For instance, even if you don't qualify for government food assistance, there are low-cost food options, food banks and food co-ops that offer vastly reduced prices. Depending on where you live, you may qualify for assistance with utility payments, child care, respite care, housing or other needs. The section that follows on getting Assistance from Public and Private Agencies addresses this topic further.
- What can you sell to raise money? Besides newspaper classified ads, yard sales and flea markets, the Internet provides many great ways to get a decent price for possessions. In addition to auctioning or selling on eBay, Amazon and Craig's List, there are specialized sites devoted to selling certain types of goods such as watches, art, and cell phones/electronics. To find these sites, use your favorite search engine to query how to sell the type of item. Be sure to read all disclosures regarding fees and obligations. Finally, remember to sell safely by requiring cash, money order or bank (cashier's) checks for payment and if selling locally, meet buyers at a public place. Consignment and pawnshops will net you far, far less than selling directly.
- What can you do to earn extra money? Some common ways people earn extra money include an early morning paper route, babysitting, pet sitting or walking, lawn care, and selling craft items. Scrap metal, including old computers can be valuable. Check online articles (Wikihow, etc.) about other ways to make or raise money including wrapping your vehicle with an advertisement for cash, and money-making "apps" that pay you for doing marketing tasks (i.e. scanning products at a grocery) or connect you with someone who wants help with a more extensive project.
Seeking Advice or Assistance from Public and Private Service Agencies
The foregoing material set out many strategies to deal with a financial emergency while avoiding debt. This final section is to provide information about how to get both advice (guidance) and assistance (benefits or help) from public and private agencies during a financial crisis.
Sometimes both the financial emergency (often related to personal or medical emergencies) and the amount of information can seem overwhelming. Talking to a knowledgeable professional who can help you assess your options and provide guidance is often helpful. There are various types of professionals and agencies to consider, and you can and should consult with more than one. Here are some categories for both advice and assistance.
Local Governmental Agencies
Look through the State, City, and County listing section in your local telephone books (these can be found in libraries). The Department of Health and Human Services or a similar type of listing can be a starting place. If you aren't sure which department you need, the switchboard answering the "general" telephone number for your city, county or state government can often refer you to the right office if you tell them what you're looking for and ask for help.
Social Workers and Faith-Based Agencies
Social workers are a prime source of advice and information for many financial and other family emergencies. You can find a licensed Social Worker in your area at the National Association of Social Worker's web site, www.helpstartshere.org. Faith-based organizations such as Catholic Social Services (serves those of all faiths) also provide social workers who can determine the benefits and services for which you may be eligible in your community and they only charge fees on a sliding scale based upon ability to pay.
Non-Profits and Charities
Particular populations are the focus of both Non-Profits (domestic violence victims, migrant farm workers, etc.) as well as governmental agencies (Veterans' Administration, Elder/Adult services, etc.). The United Way has many non-profit partners that are community-based and offer a variety of services. Call 211 to connect with the United Way and they will help you find organizations who will help with your particular needs, including financial counselors. If you qualify financially, Legal Aid or Legal Services organizations can also be a source of benefit information. Hummingbird's Learning Center is always available to you free with Consumer Resources by category so that you can easily find the resources that are of interest to you.
Financial Advisors and Counselors
To find a debt counselor, start by looking at the "dealing with debt" area of the Federal Trade Commission's consumer website at www.consumer.ftc.gov. The FTC provides information on what to look for in a reputable credit counselor and what questions to ask in selecting a financial counselor. This site also has a wealth of other helpful information, including things to avoid.
In addition to the large national credit counseling agencies, university extension programs usually offer financial counseling and some financial counseling agencies are also United Way agencies.
Federal Agency information
The US Department of Health and Human services offers information about getting health care, as well as health clinics listing at www.hrsa.gov. Social workers and the other sources listed above can also advise you about any federal aid to which you may be entitled.