Q&A: Big debt is bad in the coronavirus downturn. But a consolidation loan might not be the answer

Dear Liz: I have about $40,000 in credit card debt and am considering a consolidation loan. I’m current with my cards. My income is about $130,000 per year. Can you recommend a lender? Any cautions?

Answer: As you probably know, this is a bad time to be burdened with a lot of debt. But taking out another loan may not be the answer.

Personal loans — the type of unsecured loan often used to consolidate other debt — work out best when you can lower the rate on your debt, get it paid off within three to five years and avoid accruing more debt while you do so.

Unfortunately, people who take out consolidation loans often don’t, or can’t, fix the problem that caused the debt in the first place. If the debt came from overspending, for example, they don’t trim their expenses to match their income and wind up borrowing more. If the debt is from medical bills, ill health may cause them to incur more medical-related debt.

Another issue is interest rates. Personal loans typically have fixed rates, which is good, along with fixed payments so you actually pay off the debt over time. That’s in sharp contrast to credit cards, which usually have variable rates and minimum payments that don’t pay down much of your principal.

Unless your credit is good and your income secure, though, you may wind up paying a higher rate than you are now — assuming you can get a personal loan at all. Lenders have tightened their standards considerably in recent weeks because of the current and expected economic fallout from the pandemic.

Many people are better off paying down their debt on their own, making extra payments to get their highest-rate card paid off first, and then moving to the next-highest-rate card, while paying minimums on the rest. (Another approach is to pay the smallest balance first, to give yourself a psychological win that can motivate you to keep going.)

If you can’t pay more than the minimums, then you’re likely in too much debt to dig your way out on your own. Consider making appointments with a credit counselor affiliated with the National Foundation for Credit Counseling and with a bankruptcy attorney (the National Assn. of Consumer Bankruptcy Attorneys offers referrals) so you can better understand your options.

Q&A: What to do if an employer messes up your 401(k) coronavirus hardship withdrawal

Dear Liz: I used the Coronavirus Aid, Relief, and Economic Security (CARES) Act to cash out my 401(k). My ex-employer waived the 10% penalty but withheld 20% for federal taxes. It seems unconscionable to keep $20,000 of my money for at least eight months instead of sending it to me. The law states I have three years to pay the taxes and I need that hard-earned money now. Is there anything I can do to make my former employer release my money?

Answer: Please contact your former employer immediately. It sounds like what you got was a regular distribution, which can be penalized as well as taxed and which can’t be paid back. Your employer can’t waive an IRS penalty — it either applies to the distribution by law or it doesn’t — and the 20% withholding indicates this was not a coronavirus hardship withdrawal, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Coronavirus hardship withdrawals allow qualified people to withdraw as much as $100,000 of their balances from 401(k)s and IRAs, but these withdrawals aren’t available to everyone. You must have been affected physically or financially by the pandemic.

Plus, if you want to take the distribution from a 401(k), check if your employer is offering the option. A majority of employers now offer coronavirus hardship withdrawals, according to a Willis Towers Watson survey, but some are opting not to do so.

If you qualified for a coronavirus hardship withdrawal from a 401(k) plan offering that option, the distribution should not have been subject to withholding.

You would owe income taxes but not the usual 10% federal early withdrawal penalty, and you would have three years to pay the income taxes on the withdrawal. You also would have the option to pay the money back within three years and then amend your tax returns to get the taxes you paid refunded.

If your former employer did not offer coronavirus hardship withdrawals but you otherwise qualified, you had the option of rolling your 401(k) money into an IRA and then taking a coronavirus hardship withdrawal from the IRA. (You can typically roll money out of only a former employer’s plan. If you’re still working for that employer, such rollovers usually aren’t allowed.)

If your employer won’t release the withheld money, you still have a way to limit the damage. You can put the rest of what you received into an IRA, as long as you do so within 60 days, and then take a coronavirus hardship withdrawal from the IRA.

Unless you can come up with the $20,000 that was withheld, however, you’ll have to pay taxes and penalties on that $20,000 and you won’t be able to pay that money back. That’s unfortunate, but it’s better than having the entire $100,000 penalized and not having the option to pay any of it back.

Q&A: Getting your stimulus check

Dear Liz: Do you have suggestions on what we should do about not receiving our stimulus check? We have our Supplemental Security Income checks direct deposited, making our bank information correct and known to the IRS. I have checked the IRS “Get My Payment” site daily and continue receiving the message, “payment status not available.” I’ve contacted the IRS, our governor, both state senators, our congresswoman, the mayor and several in the media without a response. Whom can I contact to receive an answer and information?

Answer: The U.S. Treasury Department says people who receive SSI should receive their relief payments in early May. The huge volume of payments means the money is being doled out in stages, but the IRS portal that’s supposed to help you track your payment has experienced a number of glitches.

One possible workaround is to enter your address on the IRS website in capitalized letters. Older computer systems and buggy programs sometimes respond to capital letters when they can’t process lowercase ones. The IRS insists the tool is not case sensitive, but it does suggest not using punctuation when entering your address.

The $1,200 payments are being sent automatically, but if you’re on SSI and have children 16 or younger, you only have until May 5 to request an additional $500-per-child payment through the IRS portal.

Q&A: A shutdown reality check

Dear Liz: Recently a reader asked about withdrawing money from an IRA to pay credit card debt. You mentioned the many ways that was a bad idea, including the fact that retirement money is protected in bankruptcy court. Liz, the writer had only $10,000 in credit card debt. Bankruptcy should be a last resort. A lifestyle change or picking up a second job would be a better route to knocking out the debt.

Answer: “Picking up a second job” — really? Most people will be lucky to hang on to the ones they have in the coming months.

No one suggested that this reader should file bankruptcy, but anyone considering taking money from a retirement plan to pay debt should understand this major drawback — especially now. Bankruptcy experts expect business and personal bankruptcy filings to soar because of the pandemic.

You might want to check your other assumptions, as well. People typically don’t wind up in bankruptcy court because they refused to cut out their lattes or didn’t work hard enough. They get sick or disabled, lose their health insurance, get divorced, have a breadwinner die — or get stuck in a pandemic. Those with higher incomes and more savings may be better able to weather financial setbacks, but few of us are truly immune from their effects.

Q&A: How to make ends meet if the coronavirus shutdown has reduced your income

Dear Liz: My husband’s salary was cut by more than 50%. While we are thrilled he is still employed, this deep cut will make it very challenging to pay all bills for our family of four. We don’t qualify for the $1,200 relief checks based on our 2019 taxes, which have already been filed. He is ineligible for unemployment because he’s salaried and his hours haven’t been cut. Are there other options for financial support or am I misinterpreting the government options?

Answer: You may have a few options for making ends meet during this trying time.

The first is mortgage forbearance. If you have a federally backed mortgage and have been affected by the pandemic, the Coronavirus Aid, Relief and Economic Security (CARES) Act gives you the right to forbearance for nearly a year if you request it. You can ask for 180 days initially as well as an additional 180-day extension.

Most mortgages are federally backed, including those lent or guaranteed by Fannie Mae, Freddie Mac, the Veterans Administration, the Federal Housing Administration and U.S. Department of Agriculture. If you have one of these mortgages, you won’t have to pay back the skipped payments all at once. You could spread out the payments or tack them on to the end of your loan.

To find out if you have a federally backed mortgage, and to request forbearance, contact your mortgage servicer — the company that accepts your payments. Be prepared to wait because lenders are overwhelmed with requests right now.

Even if you don’t have a federally backed loan, your mortgage lender is likely to have some forbearance options — as does your credit card issuer, your car loan company and any other lender you owe. Make sure you understand how each program works and how you would repay the skipped payments. In most cases, your balances will continue to accrue interest, but the programs could give you some breathing room while you wait for better times.

Q&A: Coronavirus aid law lets you more easily tap retirement savings. That doesn’t mean you should

Dear Liz: You recently mentioned that a person can withdraw money from their 401(k) and spread the taxes over three years. If 401(k) is paid back, they can amend their tax returns to get those taxes refunded. Because of some major home repairs, I asked our accountant about this before we proceeded. He said that he hasn’t read anything official about the above. Would you please provide where you obtained your information, so we can decide if that’s an avenue we can use?

Answer: It’s possible you had this conversation before March 27, when the Coronavirus Aid, Relief, and Economic Security (CARES) Act became law.

Otherwise, it’s kind of hard to imagine an accountant anywhere in the U.S. who hasn’t heard of the emergency relief package that created the stimulus checks being sent to most Americans, as well as the Paycheck Protection Program’s forgivable loans for businesses and the new coronavirus hardship withdrawal rules for 401(k)s and IRAs.

Those rules allow people who have been affected financially or physically by COVID-19, the disease caused by the novel coronavirus, to get emergency access to their retirement funds if their employers allow it.

Even if you do have access to such a withdrawal, you should consider other avenues first.

The income taxes on retirement plan withdrawals can be substantial, even when spread over three years. Perhaps more importantly, you probably would lose out on future tax-deferred returns that money could have earned because few people who make such withdrawals will be able to pay the money back.

A home equity loan or line of credit is typically a much better option for home repairs, if you can arrange it.

Q&A: Where’s my stimulus check?

Dear Liz: My wife and I are retired and don’t have enough income to file tax returns. How can we get our stimulus checks?

Answer: If you get Social Security checks, your stimulus checks will be sent to you automatically, either via direct deposit if that’s how you get your benefits or paper check.

If you don’t collect Social Security yet and didn’t file a tax return for 2018 or 2019 because your income was below the limit to require filing, the IRS.gov website has more information.

The IRS has started sending out stimulus checks via direct deposit for people who filed 2018 or 2019 returns and provided their bank information. Those who filed returns but did not provide their bank information can follow an IRS “Get My Payment” link for assistance.

Q&A: Push lenders for student loan help

Dear Liz: I saw your previous column about the federal student loan payments being suspended by the CARES Act until Sept. 30, with interest being waived. I reached out to my loan servicer about my loans and was told that while they are federal loans, they were made before 2010 and are not covered by the relief bill.

Answer: Your experience is an excellent example of why loan servicers have attracted so much criticism in recent years for misleading borrowers about their options.

You should have been told that although your Family Federal Education Loan (FFEL) program loans don’t qualify, you can consolidate your loans through the U.S. Department of Education’s direct loan program and the consolidation would qualify for relief. You can get more information at StudentAid.gov.

Q&A: What to do after coronavirus takes away your job

Dear Liz: I’m a single mom who just lost my job because of COVID-19. I have a mortgage, a car payment, credit card debt and a child who is headed to college in the fall. What do I do? I am very scared.

Answer: This is a very scary time. Your job now is to identify and use all the resources that may help you. You’ll need to be patient and persistent because millions of people are in the same boat.

Your first task could be among the hardest: applying for unemployment benefits. The Coronavirus Aid, Relief, and Economic Security Act, signed into law on March 27, expanded unemployment relief to include the self-employed (including contract and gig workers), people who work part time, and those whose hours were reduced because of the pandemic.

The act also adds $600 a week to the benefit amount that states offer, a supplement scheduled to last four months, and extends benefits for eligible workers until Dec. 31. In normal times, benefits end after 26 weeks.

The expanded benefits, plus an unprecedented number of job losses, have overwhelmed state unemployment offices. If possible, apply online with your state’s labor department rather than over the phone or in person. You’ll be sent important follow-up information; to avoid delays in starting your checks, carefully read that information and respond to any requests.

Unemployment benefits vary enormously by state. You may get enough to sustain you if you cut unnecessary expenses — or you may not. If you come up short, you have other options.

If your mortgage is federally backed — and most are — the CARES Act gives you a right to forbearance for up to 12 months. There’s also a moratorium on foreclosures and foreclosure-related evictions for these mortgages.

Forbearance means you don’t have to make payments, although interest will typically still accrue. Federally backed mortgages include loans owned by Fannie Mae, Freddie Mac and various federal agencies.

If you’re not sure whether your mortgage is federally backed, call your loan servicer — the company that takes your mortgage payments — and ask. Even if your loan is not federally backed, you may be eligible for some kind of relief. Explain your circumstances and ask what help is available.

Many other lenders, including credit card issuers, offer forbearance options as well. Some have information and application forms on their websites while others require you to call the customer service number to request help. Again, be prepared for long hold times.

You also can ask for more financial aid from your child’s college based on your changed circumstances. Check first to see if the financial aid office has an online form you can use or has outlined its preferred procedure for appealing a financial aid offer.

You may be tempted to put off asking for help, hoping that you will land another job before your household is on fumes. It would be more prudent, though, to assume you could be out of work for many months. Not only is unemployment skyrocketing, but a vaccine also could be a year or more away, indicating the economic disruptions likely will continue.

There’s one other part of the CARES Act that could help you: the “coronavirus hardship withdrawal.” The new law allows you to withdraw up to $100,000 from your 401(k) or IRA without penalty.
The withdrawal is taxed, but you can effectively spread the tax bill over three years. If you can repay the money within three years, you also can amend your tax returns and get a refund of those taxes.

Taking the money and not repaying it could have a devastating effect on your future retirement, but if you’ve run out of other options, a retirement plan withdrawal could help keep you afloat.

Q&A: Giving away your relief funds

Dear Liz: My wife and I are retired. We are comfortable financially, with a generous pension, maximum Social Security benefits due to start in a few months, and three years’ worth of ready cash in the bank. We don’t anticipate touching our investments until mandatory distributions from our IRAs kick in. Now we’re apparently going to get $2,400 tax-free as part of the coronavirus stimulus package. We don’t need the money, nor do we particularly want it. We’d welcome your thoughts on how we can give it away to generate the greatest good, on the individual and societal levels. Where is the “multiplier” effect the greatest?

Answer: Thank you for thinking of others. Donating money to a food bank is always a good choice. These charities often have deals with food suppliers that allow them to create far more meals using donated money than they would be able to produce with donated food. Cash also allows food banks to offer perishables. In some cases, food banks work directly with farmers to supply fruits and vegetables that are too imperfect to sell, which reduces food waste.

One option is to give through Feeding America, which represents a network of 200 food banks nationwide that feed more than 40 million people. Meals on Wheels is another option that helps 5,000 community-based programs.

There are many other ways, of course, to help people hard hit by the coronavirus pandemic. Before you give to a charity, check it out at one of the watchdog organizations such as Charity Navigator or CharityWatch. You’ll want to make sure the bulk of your money supports the cause, rather than fundraising efforts or overhead.

You also can use the checks to directly help people or businesses in need. Buying gift cards from local restaurants and small businesses offers a potential two-for-one benefit: You can give the cards to people who need the assistance while you help keep the businesses afloat. Or you can subscribe to newspapers and public radio stations that are working hard to bring you accurate and timely information about staying safe in the pandemic.