What to Do if You Can’t Pay the Bills

By Victoria Sado

If you recently lost your job or a good chunk of your income, you’re not alone. An astronomical number of people are out of work right now — and most people don’t have any emergency savings, leaving them to wonder how they’re going to make ends meet.

An illustration of a coffee mug and some paperwork sitting on a table.

That’s a scary place to be, but it doesn’t have to be hopeless. There are usually some things you can do to help pay the bills when your income’s been disrupted — and right now, you have even more actions because of the emergency relief actions taken by Congress. Here are the four steps we recommend taking, in order.

1. Eliminate or reduce as many expenses as you can

First, take a close look at what you’re spending money on today so you can cut back to an essentials-only budget. This includes finding places where you can afford to spend less, but it might also involve re-negotiating your bills and debt payments, putting student loans or your mortgage into forbearance, and applying for government assistance on expenses like groceries. Here’s a step-by-step guide to making those cuts.

2. File for unemployment and look for ways to supplement it

If you lost your job or part of your income due to the pandemic, you may qualify for unemployment benefits. (The CARES Act added more money and expanded eligibility to contract workers.) File for unemployment ASAP so that you have at least some money coming in. Then, if possible, start looking for other opportunities to earn money now.

3. Use credit strategically

If you don’t have enough cash to pay the bills, even after you’ve cut back to just the essentials, credit can help. But borrowing on credit costs money, so it’s good to have a plan. Here’s how to approach it.

Take stock of the credit options you have

First, make a list of all the forms of credit you have right now. Those might include:

  • Credit cards.

  • Personal loans you might qualify for (don’t apply yet, though).

  • A home equity line of credit (often abbreviated HELOC), which lets you borrow a little bit at once, as you need it, against the equity you’ve built in your home. You can pay it back over time.

  • A home equity loan, which lets you borrow one big lump sum against the equity in your home and pay it back over time.

  • A reverse mortgage loan or line of credit, which involves you borrowing back mortgage debt until you no longer need the house, at which point you’d typically sell it to pay off your debt. (Caveat: These are only available to people who are at least 62 years old and can be complicated, so definitely read the fine print.)

Figure out your credit limit on each one

When you make your list of credit sources, note how much of each one’s credit limit is available. And if any of your lines of credit are maxed out, it can’t hurt to call your provider to see if they’d be willing to increase it. That will help you know which ones you can use for new expenses that come up.

Look for introductory offers

Now’s the time to look into low-interest introductory rate offers you may have gotten recently. For example, if you have the chance to get a credit card with a 0% interest rate on purchases for the next 12 months, or a personal loan with a really low rate (check with your bank to see if they’re offering them to help people get through coronavirus), those could be your first two options.

Also, check to see if any of your credit cards are offering low interest rates on balance transfers — if they are, you could charge necessary purchases on a card with a different company, and then transfer the balance to get a lower rate.

(Just read the fine print, so you’ll be prepared if any of them charge really high interest rates once the promo period is over.)

Start with the lowest interest rate first

Finally, put your list in order from the source with the lowest interest rate to the highest. The higher the interest rate, the more you’ll pay in the long run, so if you end up dipping into the credit you have available, start by using the source at the top of your list (the one with the lowest interest rate) and work your way down as needed.

4. If you have retirement savings, they could be a last resort

We generally don’t recommend withdrawing money from your retirement accounts unless you have truly no other options. It might feel strange to use other options before tapping into assets that you actually own (especially unemployment and other government benefits, which even at times like these can carry a stigma). But there’s a reason to do it this way. Taking advantage of temporary assistance or going into short-term debt now — in order to weather a global disaster — could help you avoid the need for longer-term assistance in retirement someday.

If you take money out of your retirement accounts, it can be really hard to catch up later. Plus, if you do it now, while markets are down, you’d be “locking in your losses” — aka not giving yourself a chance to recover if the market goes back up.

Special rules under the CARES Act

There’s typically a 10% penalty if you withdraw money from your retirement accounts before you turn 59½, which is another reason we don’t typically recommend dipping into your retirement account. But right now may be a special case.

The CARES Act waived some of the penalties temporarily. You can withdraw up to $100,000 without penalty if you need that money as a “coronavirus-related distribution.” That means if you had the virus, cared for a partner or dependent who had it, or suffered financially because of the quarantine — think furloughs, layoffs, reduced work hours, lack of child care, and possibly other reasons.

The legislation also allows you to replace the funds you took out over the next three years, even if doing so puts you over the annual contribution limit for your account. That could help you to catch back up to where you were — if you’re able to replace the funds.

Whether or not you have to pay income taxes on withdrawals will depend on what type of account you’re withdrawing from.

If you have a Roth retirement account, like a Roth IRA or Roth 401(k), any money you’ve put in there has already been taxed. That means you can withdraw your contributions tax-free (and penalty-free, too, in “normal” times). This makes them a good place to start withdrawing from, if you must.

If you also withdraw your earnings (aka any money your investments have made) from a Roth account, you’ll have to pay income tax on them. The CARES Act says you have the next three years to pay those taxes, unless you replace the money before then, in which case you won’t have to pay the taxes after all. Same goes for any withdrawals you make from a non-Roth account, like a traditional IRA or 401(k).


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Victoria Sado

Victoria Sado is a CFP® Professional at Ellevest. She works with Ellevest clients to help them take financial control and make a plan to hit their money goals.