What Not to Do!
What Not to Do financially with the Coronavirus
WHAT NOT TO DO!
Remember that the “rules” are different in an emergency.
You need to think differently about things like paying your debt.
This is an emergency.
Think twice before you take money out of your retirement.
You may be better off financing living expenses – you can always borrow against your retirement later, or even take a distribution if permitted.
Keep that option open as long as you can!
If you need to rely on a 401k, note these new rule:
- Retirement account participants can withdraw up to $100,000 for coronavirus expenses.
- The income tax due on a retirement account withdrawal can be paid over three years.
- Savers have three years to put withdrawn funds back in a retirement account.
- Retirees can delay taking required minimum distributions from retirement accounts in 2020.
- 401(k) loan limits increase to 100% of your vested account balance up to $100,000.
- The 2019 IRA contribution deadline has been extended to July 15, 2020.
But! Also remember that your retirement funds are TOTALLY 100% PROTECTED IN BANKRUPTCY!
Assume that you experience job loss or income reduction and you need to pay for 6 months of living expenses at $5,000 per month. This $30,000 debt is typical of the amount of debt we see in Southern Ohio bankruptcy cases.
You may be able to borrow these funds, or put the expenses on credit card debt, until the economy settles down and your income returns.
You might want to consider a bankruptcy option, along with using your retirement to get you through.
If you qualify for a chapter 7, the $30,000 would be forgiven, with no tax consequence.
If you qualify for a chapter 13, the $30,000 could be paid back over 3 to 5 years, at no interest, in an amount that ranges from a minimum of 1% to a maximum of 100%. Payments could range from $85 to $600 per month.
If you want to pay the debt back, but are afraid that you may once more experience an interruption in your income, and we know that could happen at any time, you could choose the 100% chapter 13 option, which normally provides a way to lower payments if your income drops. You could even convert this chapter 13 to a chapter 7 if you needed to in most cases.
REFINANCING YOUR HOME TO GET CASH
You have probably spent most of your life building up the equity in your home.
You might consider refinancing the home, or taking out a home equity line of credit (which is a second mortgage, but lenders often don’t like to use the term “mortgage” because it frightens some people) in order to get cash to live on.
This is an option for some, but there are a few things to keep in mind.
Remember that your equity in your home is a federally protected asset.
Up to over $250,000 equity protection exists for a married couple owning property jointly.
If you take out a mortgage, or refinance to take cash out (increasing the balance due on your home), you HAVE TO PAY IT ALL BACK.
Assuming you have the $30,000 debt situation described above, you would have to pay that full amount back, at interest, if you financed your living expenses out of the equity in your home.
But, you would also have the same chapter 7 and chapter 13 options described above, assuming you did not have more equity in your home than the law provides. Most of us don’t.
BORROWING FROM FAMILY AND FRIENDS
When times are tough, we often turn to our family and friends for help.
If you have family or friends who are able to help you, you’re fortunate.
But there are a few things you’ll want to keep in mind.
Remember, the future is uncertain.
You may need to consider options, especially bankruptcy, later, and you need to protect your options.
When we borrow from family or friends, we really want to pay them back just as soon as we can.
(I know, I’ve been there too. I hated to take the money but I had no choice. So if you’re in this situation, remember that you would gladly extend help to others if you could. Don’t feel bad, this is an emergency)
If you pay back the loan (or gift) you got from family or friends, you may later regret it, if you need to file bankruptcy.
Payments to friends and family are considered preferential payments, and if you need to file bankruptcy, you can, but the bankruptcy trustee will have to recover the funds you paid to your family and friends.
This is a really bad situation.
You need to file bankruptcy but doing so will harm the very people who helped you.
If you accept financial help from family or friends, and think you may need to file bankruptcy later, you should not pay them back – at least not until you’re certain that your financial situation is stable, and you will not need to consider bankruptcy for the next year.
For more information on the coronavirus (COVID-19) visits https://www.cdc.gov/