Unemployed Workers Face Limited Financial Options

People who have lost their jobs can file for unemployment benefits and talk to their lenders about skipping payments.
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The number of Americans who filed for unemployment rose to over 3 million last week while the pace of more workers losing their jobs will rise, creating more financial hardships for people who were already saddled with debt.

The shutdowns due to the coronavirus forced many small to medium-sized companies to close their businesses and lay off millions of workers who are now fearful of how they will pay bills ranging from their mortgages to credit card payments.

President Trump signed a $2 trillion aid package on March 27 after the stimulus package was passed by both the Senate and the House of Representatives. His signature on the bill means millions of stimulus payments can be sent to Americans. Adults are expected to receive $1,200, but the amount varies depending on your income level. Children age 16 or under would receive a $500 payment. The IRS will send out payments via direct deposits.

Unemployment benefits were extended by another 13 weeks and allows for freelancers and other part-time workers to be included in them.

Many mortgage and auto lenders have offered to extend repayment periods and allow consumers to skip April’s payment because of the hardship caused by the shutdown. Lenders such as Ally Financial  (ALLY) - Get Report have said current borrowers can skip payments for the next four months without being charged for late payments while new auto consumers have the option to defer their first payment for 90 days. The company is extending its reprieve for mortgage payments up to 120 days and will not charge late fees. Ally Bank is waiving fees for overdrafts, expedited checks and debit cards, and excessive transactions on savings accounts for the next 120 days.

Bank of America  (BAC) - Get Report has given consumers the option to submit an online request for a payment deferral for their credit cards. The bank said consumers can seek deferments and refunds on fees on a case-by-case basis for consumer and small business deposit accounts, consumer and small business credit cards, small business loans, auto loans, mortgages and home equity loans. The bank said they will not conduct negative credit bureau reporting for customers whose loans were paid on time.

Consumers who opt for these reprieves will still have to pay interest on the loans. The  missed payments will extend payoff dates.

Communicate with your lenders since most of them will have options to assist with a short-term hardship, said Jim Triggs, CEO of Money Management International, a Sugar Land, Texas-based nonprofit debt counseling organization. Consumers have to reach out to take advantage of them and it may mean waiting for an extended period on the phone,

“Credit card companies don't want a bunch of delinquencies,” he said. “We will see more programs help consumers not get ruined financially. The last thing mortgage lenders want is a lot of foreclosures.”

Order of Paying Bills

File for unemployment benefits through your state’s program. The bill includes self-employed people. Start prioritizing the order of payment for your bills. If you filed your taxes already, expect your income tax refund to arrive in 21 days.

“The best advice is that if you are experiencing financial difficulty is to contact your creditors and explain the circumstances,” said Greg McBride, chief financial analyst for Bankrate, a New York-based financial data company. “There are forbearance and other options available, but you have to reach out and ask.”

Forbearances will pause the requirement for monthly payments, but they will eventually need to be made.

“This can give borrowers a much needed reprieve at a time of great financial stress,” he said.

The Department of Housing and Urban Development (HUD) stopped all foreclosure and evictions for single family homeowners with FHA-insured mortgages for the next 60 days and evictions of persons from FHA-insured single-family properties.

Under the bill, landlords who have mortgages owned or backed by Fannie Mae, Freddie Mac and other federal entities can not assess fees or penalties for nonpayment of rent.

Homeowners should pay their mortgage first if their lender will not give them a temporary reprieve, followed by their auto payments, Triggs said.

“If you cannot cover all of your expenses, ensure that you cover your basic living expenses first, then your mortgage, then secured debt like a car and finally other debt like credit cards or personal loans that are not secured with collateral,” he said.

Cars are typically repossessed within two to three months, but consumers who call their lenders will find out they tend to work with people to find alternatives for payments.

“They should work with you to get through this because the banks don’t want a bunch of repos,” Triggs said. “But you have to reach out to banks and lenders."

Repossession and foreclosure actions typically come with a good deal of advance notice. Account collection activities typically begin after the first missed payment and become more pronounced as the account moves past the 60 and 90-day delinquency mark, said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization.

“By the 120 day threshold, there are typically clear indications regarding escalation toward repossession or foreclosure,” he said.

Collateralized accounts such as mortgages and car loans and student loans should be a priority, but special hardship programs “help make it easier to keep the accounts from becoming delinquent,” McClary said.

The government already said federal student loan borrowers can get a reprieve of  two months from payments and interest. The stimulus package that was passed Friday included a provision for borrowers to automatically skip payments through Sept. 30. Contact your lender if you have private student loans about refinancing options and deferment. 

Borrowing from Retirement Accounts

While many people may be unemployed for several months or longer, borrowing from your 401(k) plan or IRA can be risky. Although interest rates for a 401(k) loan are typically low, if you wind up losing or leaving your job, the loan often has to be repaid within 60 days.

If you don’t have the cash to pay the funds back, the loan is treated as a distribution that is subject to federal and state income tax, as well as an early withdrawal penalty of 10% if you’re under the age of 59.5. 

Under the pandemic package, employees can withdraw twice the usual amount of up to $100,000 only if it is related to the coronavirus. 

“I see only cons and no pros from borrowing or withdrawing early from a 401k,” said Robert Johnson, a finance professor at Creighton University in Nebraska. “The choice to save for retirement is a choice between current consumption and future consumption.”

There are not any provisions to take out a loan from an IRA, but you can withdraw money at any time. If you’re under the age of 59.5, the 10% withdrawal penalty applies.

If you make coronavirus-related withdrawals, the new bill allows you to withdraw $100,000 without paying the 10% penalty.

Contributions you made to your Roth IRA can be withdrawn at any time without having to pay taxes or penalties and can serve as an emergency savings account. Do not take out money that was accrued from your earnings or you face the 10% penalty. One benefit of a Roth IRA is that you can pay back the money you borrowed as long as it's within 60 days in the same Roth IRA or another IRA, but the catch is that the IRS only allows this once a year.

If you need cash to pay bills, instead of selling your stocks, consider talking out a margin loan securitized by your stock, said Steve Sanders, EVP of marketing and product development at Interactive Brokers, a Greenwich, Connecticut-based brokerage firm.

“If you believe the stock market is going back up, this is a superior solution than selling your stock,” he said. “As of March 26, 2020, rates are 0.75% to 1.62%.”

The stock yield enhancement program enables people to lend out their fully paid shares and earn extra income automatically. It can provide some incremental income, but it doesn’t have a substantial benefit to the unemployed.

Programs for Unemployed Workers

The stimulus package includes $377 billion in federally guaranteed loans for small businesses. 

The Small Business Administration is working with governors to provide low-interest loans to small businesses and non-profits that have been severely impacted by the coronavirus (COVID-19). The SBA’s Economic Injury Disaster Loan program provides small businesses with working capital loans of up to $2 million. For more information, go to https://disasterloan.sba.gov/ela/.

Small business owners who currently have a business relationship with an SBA Express Lender can borrow up to $25,000 with less paperwork. These loans can be a term loans or used to bridge the gap while applying for a direct SBA Economic Injury Disaster loan.

Corporations from Miller Lite to crowd-funded groups have created donation funds for unemployed workers. Molson Coors Beverage Co. pledged $1 million and spirits company Beam Suntory and wholesaler Southern Glazer’s combined pledged another $1 million to the United States Bartenders' Guild, a nonprofit that supports bartenders and other service industry professionals. Former employees can via www.usbgfoundation.org/beap.

For hourly workers, there is a fund that will disperse money through two non-profit organizations.

Organized by Yashar Ali, a New York Magazine/HuffPost Contributor on behalf of GoFundMe.org., the crowdfunding platform, this fundraiser has created a fund to pay hourly workers. The funds will be distributed to workers via Robin Hood in New York City, a non-profit organization that has provided funding to under-resourced communities across NYC for more than 30 years, and Tipping Point Community, a foundation that began in 2005 that works to break the cycle of poverty for people living in the San Francisco Bay area.

For more information, go to https://www.robinhood.org/ or https://tippingpoint.org/.