The past year has fractured our world in countless ways. Now, as people look to pick up the pieces, those managing debt must be held accountable for their position in our uneven economic recovery.
In this so-called K-shaped recovery, one part of the population bounces back quickly while another has a longer, slower path. For example, in January, the unemployment rate for whites was 5.7%, compared to 8.6% for Hispanics and 9.2% for black workers and 6.6% for Asians, according to the Bureau of Labor. Statistics.
Those who remain unemployed or underemployed may continue to take on debt to get by. Meanwhile, those whose finances have remained stable or improved may be ready to clear their debts.
Managing Debt in the Lower Half
Some consumers have had no choice but to rack up debt, including unpaid rent or mortgages, credit card debt and overdue utility bills. If this is your situation, focus on basic needs and pay minimums to avoid collections.
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Protect the essentials
If you’re one of the millions of Americans unable to cover your housing costs right now, take advantage of the eviction moratorium and mortgage relief programs now extended through June 30. Keep an eye out for additional benefits from the COVID-19 relief program being discussed. in Washington and call 211 to connect to local assistance for basic needs like food and shelter.
Add transportation, internet, and cell phone to your list of priorities too, so you can stay in touch with friends and family for help and looking for work.
“All creditors will make it look like they’re the most important to get paid,” says Amanda Christensen, a financial coach based in Morgan, Utah. “Accommodation and transportation should come at the top of that list and take priority.”
If necessary, look for cheap credit
If you need to add debt to cover regular expenses, like groceries and utilities, financial coach Vineet Prasad of Fulton, Calif., suggests finding the cheapest options. “A revolving line of credit against your home equity has a much lower APR than a credit card. Another option is a personal loan from a credit union.
To qualify for a HELOC, you will generally need equity of at least 15% of the value of your home. And weigh the risks: HELOCs tend to have adjustable interest rates, which can make them more expensive over time, and your home is at risk of foreclosure if you can’t repay the debt.
Focus on long-term recovery
Once your situation has stabilized, focus on paying off your debts and also make saving a priority.
Consider using a debt repayment calculator that can track your debts and monthly payments. And while you may be tempted to spend all of your excess income on paying off debt, putting money aside can help you weather the next financial crisis.
Saving even a small percentage of your income helps, says Christensen: “If you’re not saving anything right now, see if you can hit that 1% to 5% range.
Managing Debt in the Upper Half
If your finances have held steady or improved in 2020, think about how you can take advantage of your situation, whether through charitable donations or using some of your money to improve your finances.
And if your focus is on reducing debt, the classic earning playbook works well: Start by taking stock of what you owe. Consider using a spreadsheet or online debt tracker to organize your balances.
Then choose a payment strategy, like the debt snowball method where you focus on your smaller debt by paying as much as you can while paying minimums on others. Once it’s paid off, incorporate the amount you paid into paying your next largest debt and so on until you’re completely debt free.
Paying off debt can be a long game. To stay focused, Prasad advises finding someone who can serve as a confidant and encouragement.
“Getting a responsible partner who is good at managing money can usually be a huge differentiator with sticking to your plan and struggling to pay it back over time,” he says.
Anyone can be in crushing debt
Regardless of your income or employment status, you might have too much debt to realistically repay with a strategy like the debt snowball. If all your monthly debt payments, including housing, total more than 50% of your monthly gross income, you may need to consider debt relief, such as a debt management plan from a counseling agency in non-profit credit or bankruptcy.
The goal is to settle your debt quickly and in a way that allows you to reach your future financial goals. Otherwise, you risk spending years funneling money into insurmountable debt, sacrificing your retirement, emergency fund, and other goals.
Bankruptcy in particular can be a good option because it can help you settle what you owe in months instead of years. While bankruptcy filings fell 30% in 2020, according to the American Bankruptcy Institute, that could change in 2021 as consumer financial circumstances begin to stabilize.
To get the most out of fresh start bankruptcy offers, don’t wait so long that you can’t even pay the filing fee. Take action when you can improve your financial situation, says bankruptcy attorney Cathy Moran of Redwood City, Calif.
“When you’ve hit rock bottom and things are about to turn around, that’s when you want to drop,” Moran says.
This article was written by NerdWallet and was originally published by The Associated Press.