- Forbearance: A temporary remedy is available to protect your credit when you’re unable to pay your debts due to the government shutdown. Forbearance is a period of time during repayment when a borrower is allowed to temporarily postpone their monthly debt payments. The debts are not forgiven but regular monthly payments are suspended for a future date. This is an option when borrowers are experiencing temporary financial difficulties. Lenders can offer reduced payments, interest-only payments or no payments for a specified period of time.
- The Budget: A budget is essential to financial health. Immediately track your daily spending to be able to design a realistic household budget or develop a spending plan. You need to first know how much you’re actually spending. Cut expenses where you can as quickly as you can! People with budgets are likely to spend less and more likely to have emergency funds. Seek free financial counseling and assistance from your local non-profit organization or job center related to budgeting and effective bill paying if needed.
- Manage bills and debt wisely: When paying your monthly bills, if you think you’ll be late with a payment, contact your lender immediately to discuss the matter and request assistance like forbearance or other hardship solutions that may be available at your bank or credit union. Be sure you understand clearly what you are committing to and request the new financial arrangement in writing.
- Borrow carefully: Tough financial times sometimes result in costly borrowing decisions. Avoid Payday loans and other high interest rate debt (e.g.) R.A.C (Rent-A-Center), R.A.L (Refund Anticipation Loans). Contact first local banks and credit unions, explain your financial hardship and ask for their best loan offers (good credit is a plus). If borrowing from family and friends, it’s best to keep this loan as a business transaction by coming to the table with the amount you need, the reason for the loan and a plan for payback. The agreement should be in writing, dated and signed by both parties.
- Unemployment Insurance: Each state operates its own unemployment insurance program and many require you to file for unemployment benefits online while some provide toll-free numbers and other ways to access help in filing for these benefits. Remember to take advantage of your state’s employment services which includes employment opportunities and other beneficial resources.
- Protect yourself from financial & Job-search scams: News reports are already circulating about fraudsters trying to cheat federal employees hurting by the extended government shutdown, enticing them with free loan offers and phony job search ads. These scams often seek to gain access to personal and financial information for use in fraudulent schemes. During financial stress, people are more susceptible to financial fraud with promises of quick returns or risk-free riches. Use FINRA’s (Financial Industry Regulatory Authority) Scam Meter to check if a financial pitch carries some of the warning signs or red flags of fraud.
Should you consider accessing funds from your 401(k) plan during a financial emergency through a loan or hardship withdrawal to help solve an immediate need, be aware of consequences that can affect your long-term financial security. Let’s look at a few:
Many plans permit loans that you repay through payroll deductions as long as you remain employed. You’re borrowing your own money. Normally the term of a 401(k) loan is five years unless the money is used for the purchase of a primary residence, then some plans will allow borrowing for a 25 year term.
Advantages and disadvantages of borrowing from your 401(k) account.
The plus side:
- You usually don’t have to explain why you need the money and how you intend to spend it
- You may qualify for a lower interest rate than you would at a bank or other financial institution, especially if you have a low credit score.
- The interest you repay is paid back into your 401(k).
- Because you are borrowing instead of withdrawing money, no income tax or potential early withdrawal penalty is assessed.
The negative side:
- The money you withdraw will not grow if not invested.
- Repayments are made with after-tax dollars that will be taxed again when you eventually withdraw it in retirement or reach age 59½.
- The interest is never tax deductible even if you use the money to buy or renovate your home.
- Maybe the biggest risk you run is leaving your job before the loan is repaid. If this happens, you’ll have to repay the outstanding balance within 90 days (3 months) of your departure. Should you fail to repay, you’re considered in default and the remaining loan balance is considered a withdrawal and income taxes are due on that amount. Additionally, if you’re younger than 59½, you may also owe the 10 percent penalty.
The IRS allows withdrawals from the 401(k) for certain financial emergencies. However, it’s up to your employer to determine the specific criteria for a hardship withdrawal. These circumstances are:
- Out-of-pocket medical expenses;
- Down payment on the purchase or repairs on a primary residence;
- College tuition and related educational expenses
- Threat of mortgage foreclosure or eviction;
- Burial and funeral expenses.
You should consider a withdrawal from your 401(k) as a last resort!
Companies often prohibit contributions for at least six months after taking a withdrawal and those hardship distributions permanently reduce your account balance. Please remember that taxes are due on the amount you withdraw and will incur the 10 percent penalty if you’re under age 59 1/2. Additionally your plan administrator may follow up after the withdrawal to verify that the funds were used for the purpose indicated on your application.
Finally, you cannot be forced to use your 401(k) money to pay state and local income taxes, property taxes or other taxes, however, a court may order you to withdraw money from your 401(k) to pay child support, alimony and federal income taxes owed.
State and federal laws differ, so seek legal advice to determine which will apply.