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Cash Flow Crunch: Be proactive, but don’t panic!
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1) Reduce spending as much as possible. Distinguish between needs and wants. Without an adequate Emergency fund, it will be tempting to use credit cards.

  • Cancel or suspend non-essential services such as cable (especially premium channels). You can borrow movies for free or very inexpensively at the library.
  • Conserve utilities (lower the heat, unplug appliances you aren’t using, etc.)
  • Driving slower uses less gasoline
  • Consider ways to cut your grocery bill (coupons, planting a vegetable garden, etc.)
  • If you have both, consider cancelling a land line and using only a cell phone.
  • Etc.

For those serving Active Duty in the military:

If you haven’t gotten around to requesting reduced interest rates on debt acquired prior to AD under Service Members Civil Relief Act—now would be a good time to do so. 

Fax this letter along with a copy of your orders to each creditor.


2) Prioritize bills....

  • Mortgage/rent and auto loans are the priority over credit cards. These are the largest and likely most difficult payments to make. Reach out to creditors ASAP and make them aware of the situation.
  • Many cable providers won't cut you off for a late payment (or even charge a late fee). They don't even report to the credit bureaus until an account lands in collections. Same with many utilities with the exception of a very small late fee (they can cut you off after 45 days of non-payment… but if you are proactive they are likely to work with you and perhaps provide fuel fund relief).
  • Although you may be charged a fee, a payment isn’t "late” in the eyes of the credit bureau until it is 30 days late. Remember everything does not report to the Credit Bureau. Do your best to avoid any 90 days late (for those creditors that do)… these are almost as damaging as bankruptcy. But don’t just struggle along. Negotiate.
  • If you end up with some late marks on your credit report, contact each reporting bureau and include an explanation in your file. This is your opportunity to let anyone who looks at your report understand you fell behind due to the cash flow crunch caused by __________.
  • It’s painful to say, but make only minimum payments on any credit card balances. Access to cash is more important than paying down debt at times like this. Of course this depends on the amount of cash reserves and income you do have.
  • Landlords and other locals to whom you may owe money are people too. Their cash flow may already be tight or become tight because you are behind in payments. Give them a heads up so they can make adjustments on their end.
  • If you are paying child support, make sure your child’s custodial parent knows that these payments may temporarily stop so they can make adjustments.

Check in with creditors regularly to update them about your situation.Document all conversations, including dates, times, what was discussed and with whom. Don't be shy about asking for waivers of fees, penalties, etc. Here is a letter you can use to request that payments, interest and fees be reduced or frozen.

For furloughed Federal employees:

If you have an outstanding TSP loan and are furloughed, your repayments will cease. You are not considered in default until you have missed more than 2.5 payments. At this point you will receive a letter requesting a direct payment. Click here for a coupon to accompany this payment.

In addition to the above, consider tracking all income and expenditures monthly. At your discretion you can share this information with creditors to demonstrate you are doing the best you can to repay them. Should you end up in court in the future, a judge must certainly look kindly on one so diligent and may not look favorably on a creditor who would not work with you. Keeping good records cannot hurt you.

 

3) Consider all sources of liquidity

  • Apply for unemployment benefits as soon as possible. Hopefully you will be back to work quickly, but it can take several weeks for them to start so you should start the process ASAP.
  • Use your Emergency fund carefully.
  • Perhaps your place of worship will help.
  • Nothing can ruin a relationship like money, so carefully consider before approaching family or friends. The situation should be temporary and make repayment a priority.
  • Can you hustle? Consider a part time job until your financial ship is right again, have a garage or yard sale, etc.
  • For those that have access, a home equity line of credit may be among the most inexpensive places to borrow.
  • If the cash crunch is not due to job loss, you can borrow up to the lesser of $50,000 or 50% of vested 401k balances.
  • If you have lost your job, any loans will be considered a premature distribution unless repaid within 60 days.
  •  Any withdrawals will be taxed at ordinary income tax rates plus a 10% premature distribution penalty if you are under age 59 1/2 (IRA) or under age 55 (qualified plans such as 401k, 403b, TSP, etc.) unless repaid within 60 days.
  • You can withdraw actual dollars contributed to ROTH IRAs with no tax consequences. Raiding retirement assets is not ideal, but must be considered.
PLEASE NOTE: Retirement plan assets should only be used as a last resort to remedy cash flow problems that are short in nature. If you should ultimately go to bankruptcy these assets are protected and you would get to keep them. Bottom line: don’t drain retirement accounts to temporarily save a home that will be lost in the future anyway.

 

For those serving Active Duty in the military:

Evaluate what income casual pays can provide and request them. These must be used carefully as these loans must be paid 100% in full when pay resumes… which could mean a paycheck of $1.

Reach out to your Family Assistance Center/Airman Family Readiness Center/Fleet and Family Support Office sooner rather than later. They have access to community resources, contacts with military aid associations and help manage the Emergency Relief Fund process. They can be most effective if you get them involved before things get out of control.

You can borrow up to the lesser of $50,000 or 50% of vested TSP/401k balances. Federal employees must be in a "pay status”, so activated reserve components may not be able to borrow against balances in their civilian TSP. (For those no longer in Federal service, the balance in the Civilian TSP can be transferred to the Uniformed Services TSP). Not ideal, but it must be considered. Keep in mind that if for some reason you separate from service, the loan must be repaid in full within 60 days or the outstanding balance will be considered a premature withdrawal and the above may apply.

Any withdrawals will be taxed at ordinary income tax rates plus a 10% premature distribution penalty if you are under age 59 1/2 unless repaid within 60 days. 


4) Legal Issues

  • Court-ordered child support and other legal obligations made from salary deductions (such as wage garnishments) are no longer being met when you lose your job. You are still required to make these payments and should try to do so from other assets/income sources. 

 

Legal Protection for those serving Active Duty in the military:

Under SCRA some legal protection against eviction and foreclosure is afforded to Active Duty SMs and their Families, including Title 10 deployed SMs and their Families

A landlord must have a court order in order to evict, provided the monthly rent is under $2720.95 in 2011. The intent is not to enable military families to avoid paying but rather protect them when it is their service that impacts their ability to pay.

Protection from foreclosure is extended for nine months after leaving AD. However, you should still be proactive in working with the lender.

 

Once income is restored, make every effort to get current and be sure to build an Emergency fund of at least 3-6 months living expenses.

 

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