How to Handle Unexpected Debt
Written by Yun Yang   


It sometimes takes a long time to recover from unexpected circumstances, especially if these circumstances lead to huge debts. The key to successfully surviving these life-changing events is to anticipate hard times, shore up your financial situation now, and give yourself some breathing room. Here, we list several mostly happened unexpected events which may place you in a bad financial situation, and the ways to help you out.


Medical emergency 

No unexpected expenses total up faster than a medical emergency, especially if you are uninsured. Do not be afraid, it is manageable.

Set up a payment plan with the hospital's business office. An option for paying is to borrow against your IRA. In a medical emergency they will allow you to withdraw funds without a penalty, but you'll pay income taxes on the withdrawal. Take a look at your bill, since hospitals often overcharge those who are uninsured. Then look for a lawyer who works on a contingency basis so you don't have to pay up front. After the trail you bill could be lowered up to half. Even if you have a medical bill, always try to pay off the bills with higher interests first.

Negotiate. You may be able to get a portion of the bill reduced. Contact information for each should be included on the bill. Try talking to the service providers to see if they will reduce their fees in any way.  Here are some tips on how to negotiate with your providers.

Use your health insurance plan. If you have a company-sponsored health insurance plan, pay attention to the details of what's covered, how much the office visit co-pays are, the lifetime cap, the deductible, and what services are or aren't covered.

Seek out government assistance programs. Call your city, county or borough government representative, municipal social service agency or community organizations to get some information about the state or local government assistance programs that can help offset medical costs.


Loss of employment
 
With unemployment rates climbing, there is no such thing as a secure job today or even secure unemployment benefits. You may always want to prepare yourself for an unexpected loss of a job, so that several months’ lack of income will not completely knock you down.

Emergency funds. The best way to prepare for this is to have three to nine month's worth of living expenses saved up in your bank account. The source of your emergency account can be cold hard cash which can hold you over until you can get more out from the bank, highly liquid savings or money market accounts, and/or an IRA. You can liquidate and withdraw any amount you’ve invested in your IRA without any taxes or penalties. If you do so, you will give up any anticipated earnings (or losses) on that money. You can refund your IRA once you are no longer in an emergency up to that particular year’s maximum contribution as long as it is before April 15 of the following year. You may also need to consider reducing your spending so you don't get in debt if unemployment strikes.

Other options. If you have unexpected expenses that exceed the living expenses you have saved up in your bank account, you need to look into other options. If you own a home, you can borrow with a home equity line of credit. If you don't have enough equity in your home to do this then you can consider using your 401(k) savings. In this case you will not be taxed because you are borrowing from your own money. However, it is still a loan and if you miss a payment then the remaining balance will be considered income and will start to be taxed.

Find a temp job for quick money Often you can collect a paycheck after only one week of work. If you're in need of some fairly quick cash, temping isn't a bad way to go.


Disability

Debt problems faced by those with disabilities are often a combination of circumstances associated with the disability and related to having a low income that often results from physical setbacks. This lack of income can greatly increase the vulnerability to debt. Here are some tips for you to financially fight against disability.

Make sure you are covered. Check with your employer to make sure you have long-term disability coverage.  You don't want to wait until you really need the benefits to discover gaps in the coverage. Disability insurance pays only 60% of your current income. It's designed to be enough to cover your base expenses without offering incentive for people to abuse the system. If your employer pays your premiums as an employee benefit, the disability payments you receive will be taxable. If you pay your own premiums, your disability payments will be tax-free. Check for how long your benefits will be paid. You can lower your premiums by reducing the term of your benefits.

Social Security. For those who are not able to take any job, not just your current job, Social Security disability can cover you. However, it will pay benefits only if your disability will last more than 12 months or lead to death. There is a waiting period of five months before you qualify, and then another month before you receive benefits. So even if you have short-term disability coverage for the first 12 weeks, there will be several months of potential unpaid time.

Deferring payments on debt from disability. If you have a disability, you may need help deferring bills you cannot avoid as well as expenses such as rent, mortgage, heating bills and other basic expenditures. Contact bank or building society managers to arrange your mortgage and explain your situation. Often building societies are prepared to suspend your payments for a few months to give you a chance to sort out your finances. It is extra helpful if you can have a social worker explain your situation in a report to give it extra validity in their eyes. You can also seek to extend your mortgage term in order to pay less monthly or even get it arranged so that you make interest-only payments in order to reduce your monthly expenses. You can often seek help paying the interest on your mortgage from the Department of Social Security.


Divorce

A divorce can be one of the most difficult experiences a person ever faces. The emotional impact ending a relationship is difficult enough, but the financial and lifestyle changes that result can be just as traumatic. For most people, divorce is the biggest financial transaction they ever face.

Finding out what you owe. The easiest way to find out what kind of debts you and your spouse owe is to get a credit report. You and your spouse may have a shared credit history that you don't know all about. Get your credit report from three credit bureaus that provide credit reports: Equifax, Experian, and TransUnion.

Freezing Debt. Once you've identified your debt, your main goal is to keep it from getting any worse. The easy and quick way to do this is the time-honored adversarial divorce technique of cutting off the credit cards.  The way to do it is to call the number on the back of the card. You probably won't be able to cut off your spouse without cutting off yourself. If you and your spouse are cooperating with each, see if you can agree on a card or two that will remain in effect for designated purposes subject to designated limits on spending.

Allocating Responsibility. If you agree to be responsible for a debt, you can decide now or later whether you want to liquidate property to produce cash to pay off the debt, and you can decide as you go how many adjustments you want to make in your lifestyle to allow for repayment. Paying off your debts now is simpler, cleaner, and safer for both of you. If your spouse promises to pay your debts (or joint debts) in the divorce, be careful, the lender can still come looking for you if your spouse doesn't pay. You can reserve alimony in your divorce agreement. That way, if your spouse bails out or files bankruptcy, you can then ask the court to order alimony to compensate you for your loss. But there is no assurance. In the event that you can't avoid carrying joint debt into your post-divorce life, divvy up the debts in some roughly equal fashion. Your goal is to finish with a list of debts for which you have sole responsibility, and a separate list of debts for which your spouse has sole responsibility. Cannot make an agreement? Find a lawyer and expect to pay between $100 and $450 an hour.


Natural Disaster

A good preparation for the debt from natural disaster is to have home owners insurance. However, should a natural disaster occur you can also rely on financial relief from FEMA (Federal Emergency Management Agency). If you are insured and you still can't afford all your damages then you are eligible for a grant. However, the grant can't be used for personnel effects but rather on the home to make it safe and secure. If the cost is still not covered, the government offers low-interest, long-term loans that will help cover costs.


Death of a Spouse

The death of a spouse can be devastating. Sudden losses can be even harder. If your spouse managed the majority of the financial responsibilities, even just paying bills can seem overwhelming. But you can work your way through it.

Get Your Finances In Order. If you receive a life insurance benefit, save that money. Put it in an interest-bearing account such as a savings account or money market fund. But keep it liquid. You may need it. Make sure you have health insurance. Call your spouse's company to see if you're still covered and for how long. If you're not, get medical insurance right away.

Life Insurance Benefits. Most likely, the company will pay the proceeds directly to the named beneficiary in either lump sum, fixed payments or as interest payments on a larger amount. It may take several weeks for you to receive payments.

Social Security. Widows are eligible for a $255 death payment designed to help pay for funeral costs. You may also be eligible for survivor's benefits, depending on your age and if you have any dependent children.

Employee Benefits. Your spouse may have had life insurance, a 401(k) plan, vacation or sick pay, and other benefits to which you're entitled. Contact the human resources director at your spouse's workplace for a list of benefits. If your spouse was employed by a large company, you will still be eligible for health insurance under COBRA legislation for 18 months after your spouse's death.

Veterans' Benefits. If your spouse served in the military, contact Veterans Affairs. You may be eligible for burial expenses, money toward a plot or headstone, as well as disability benefits if your spouse already was receiving such payments. Veterans are also eligible for free burial in a national cemetery.

Miscellaneous Benefits. If your spouse belonged to a credit union, a labor union, the American Legion, a college alumni group, or other organizations, you may be eligible for insurance coverage or assistance programs.



 
Last Updated on Friday, 24 December 2010 06:26