How to Deal with Financial Problems Caused by the Coronavirus
The coronavirus, which has been spreading through the United States and the world like wildfire, poses a very real and significant health risk to the entire population. The national and local efforts to manage the spread of the virus have resulted in the closure of many businesses and public offices, including restaurants, gyms, bars, and movie theaters, bringing large sectors of the economy to a halt. The economic impact of these restrictions is instant and drastic, leaving a large portion of the population without an income source for the immediate future. For many people and businesses, the economic restrictions are impacting their daily lives much more than the coronavirus itself. Individuals may not have sufficient income to pay their living expenses, causing stress and uncertainty. Businesses, especially small businesses that rely on the constant inflow of revenue, may be left on the verge of collapse, and may be forced to shut down, or to at least lay off employees. This in turn causes more individuals to experience financial stress.
While it may not be possible to control how the coronavirus progresses, what measures are taken by the government to control its spread, and how long those measures remain in effect, each person and business can still manage its finances in a way that maximizes her or its chances of getting through this time in the best shape possible. This article discusses the issues most likely to be faced by individuals and businesses, and how to deal with them.
Dealing with the financial impact of the coronavirus: for individuals
If you are an individual, your concerns most likely center on the loss of income or employment as a result of the coronavirus. More specifically, you are likely in a situation where the loss of income has left you with insufficient funds to pay your bills. There are two approaches that you want to implement to deal with this situation: the general and the specific.
The general approach has to do with properly prioritizing your obligations. The first priority is always the expenses that are necessary for food and shelter. These include rent or mortgage, utilities, and food. You must pay these first before you pay anything else. Afterall, if you don’t have a roof over your head, it doesn’t much matter that your credit card bill is current. The second priority are secured claims, like car loans and furniture loans. Among these, you should prioritize those loans or debts that are more important to your ability to support yourself. So, for example, if you use a car for work or commuting, you should pay the car loan before paying the furniture loan. The last priority is everything else, including credit cards. If your funds are insufficient to pay all your debts, you should pay the debts in order of their priority.
The specific approach depends on the type of debt you are dealing with. Some of the most common debts are:
The good thing about mortgages is under the CARES Act, many lenders are required to provide forbearance assistance. In addition, many other mortgage lenders have or are likely to offer payment deferral or modification in light of the coronavirus. So, if you are having difficulty paying your mortgage, you should first contact your mortgage company, and determine what options it offers, and whether any of those options will work for you. Such options may include suspension of your mortgage payments for up to 12 months, removal of late fees, not reporting the delinquency to credit bureaus, and suspension of foreclosure or eviction proceedings.
Even if your lender does not offer any options that work for you, the good news is that if you just fell behind on your payments, it will likely take several months for the lender to get to the point where it can foreclose on the home. That will give you time to determine how your income will be affected long-term, and any arrears on your mortgage can be cured over time through a Chapter 13 bankruptcy.
There are both federal and state regulations that restrict evictions during the COVID-19 pandemic. Once these restrictions expire, how landlords will deal with delinquent rent payments due to the coronavirus is not clear. Some landlords may offer deferrals or other alternatives. But many, especially the smaller ones, may not be in a position to do so, because they may depend on the tenants’ rent payments to satisfy their own financial obligations. If your landlord is not willing to work with you, your options, besides paying the rent, may be limited. One would be to negotiate a termination of the lease, and to relocate to a cheaper place. This of course is not ideal. Another option that may be available is a Chapter 13 bankruptcy, which, unlike a Chapter 7 bankruptcy, allows you to keep all your property and to catch up on missed rent payments over time.
- Car payments and other secured loans
Just like with mortgages, the first step in dealing with a car loan is to contact the lender. There is a good chance that major financial institutions will offer payment alternatives just like the mortgage companies. If your lender does not offer such alternatives, then you will want to consider whether you want to keep the vehicle or other property that secures the loan. Obviously, if it is your only car, the answer would likely be yes. But if it is a recreational vehicle, the answer may be no. If you do want to keep the vehicle, and your finances do not allow you to keep making the regular payments, you may, again, benefit from a Chapter 13 bankruptcy. A Chapter 13 bankruptcy can allow you to stretch out payments on the car over up to 5 years, effectively modifying your monthly payment, and may even enable you to reduce the amount you have to pay for the car. In addition, the amount of the payment does not have to be the same every month, and can be lower or even zero early on in the payment plan, while you are presumably still struggling financially.
If you have tax liabilities, you should be able to get a delay on your payments by contacting the taxing authority (either the IRS or the state department of revenue). In the unlikely event that you are not able to get assistance from the taxing authority, you do, again, have the option of modifying your tax payments through a Chapter 13 bankruptcy.
- Credit cards and other unsecured debts
Just like with other debts, the first step is to contact the lender, and to determine what kind of options the lender offers in light of the coronavirus emergency. If the lender is unwilling to work with you, or you are unable to pay the debt for whatever reason, not to worry. As noted earlier, your priority must be to pay those bills that relate to your living expenses. Unsecured debts like credit cards, medical bills, and personal loans, have the lowest priority. Even if they remain unpaid, you can resolve them later. One way to resolve them would be by negotiating a settlement. Another way to resolve them would be through a Chapter 7 bankruptcy. However, if there a minimum payment associated with the debt and the minimum payment is small and you can afford to pay it, you may consider paying the minimum payment to avoid excessive late charges.
Dealing with the financial impact of the coronavirus: for businesses
If you are a business owner, your concerns are probably very similar. You likely have fixed monthly financial obligations that you must meet to keep your business operating. These may include rent and utilities, payroll, insurance, and advertising. In order to meet these obligations, you of course must have revenue, and if your business has been shut down due to the coronavirus, then there is an obvious problem. The first thing to consider if you are in this situation is whether your fixed expenses can be reduced or eliminated, at least temporarily. For example, if you pay for advertising, you will want to determine whether the advertising can be reduced or cancelled. Some expenses may be reduced simply by virtue of the business not being open, such as utilities. And while nobody wants to lay off employees, especially small business owners who have developed a relationship with their employees, if your business is fighting for its financial survival, then it is an option that must be considered. The layoff can be temporary (akin to a furlough), but the bottom line is that if your overhead is too high given your revenue, then you must do all you can to reduce your expenses to more closely reflect your income.
The next step is to determine whether the creditors and lenders will offer any payment modification or other relief due to the existing emergency. This can be determined by simply contacting the relevant lender or creditor.
The third step to consider is how the business slowdown (or shutdown) will affect the business in the long term. For example, despite your best efforts to reduce your expenses, you may be left with significant debt due to the slowdown, or you may be behind on your rent, an equipment lease, or a secured loan. If the business prospects on the revenue side remain strong, in other words, if you can expect to generate sufficient revenue to be profitable had it not been for the increased debt, then you have at least two options. The first is to negotiate payment arrangements with respect to the debts on which you are behind. This is most effective when there is only one or very few large creditors. The second option is to restructure the business through a Chapter 11 bankruptcy. This is most effective when there are multiple creditors, or when one or more of these creditors are not being cooperative. In such situations, a Chapter 11 bankruptcy can be much more efficient and cost effective, and allow the business breathing room to focus on reestablishing itself without the pressure from creditors.
Whether you are an individual or a business, and are trying to deal with the financial impact of the coronavirus, the important thing to remember is that just like prior pandemics, this one will pass. Your goal in the meantime is to make the best of a bad situation, and to best position yourself for recovery once the virus does finally pass. You can do this by following the simple advice discussed above.