Coloradans rank fourth in nation for their amount of debt. Here’s how you can seek relief. - The Denver Post

Colorado consumers carry some of the heaviest debt burdens in the country, rivaling those found in expensive states like Hawaii and California. With historic job losses from the pandemic causing incomes to evaporate, that debt now risks becoming an anchor that sinks many households.

“The great unknown is how long this will continue to affect people’s income,” Christina Tetreault, manager of financial policy at Consumer Reports, said during a “Protecting Your Finances” webinar on Monday.

Going into the crisis, about four in 10 U.S. households were already living paycheck to paycheck, Tetreault said. For those who had built emergency reserves, a majority had less than two months’ worth of living expenses available. That’s about how long the pandemic has sidelined economic activity.

The CARES Act includes several provisions that allow borrowers to defer mortgage and student loan payments, and auto lenders and credit card providers are showing a willingness to work with struggling borrowers, according to Consumer Reports.

Borrowers who can’t stay current on a federally backed mortgage because of COVID-19 disruptions can request a six-month deferral of payments, with another six months available if they still are struggling.

Nearly 4 million U.S. mortgages, or 7.9% of home loans outstanding, were involved in a forbearance plan as of May 3, according to the Mortgage Bankers Association. And while the pace of people signing up for relief had slowed, it will likely pick back up again as May payments come due, predicts Mike Fratantoni, chief economist at MBA.

Some mortgage servicers have told borrowers who ask for forbearance that any missed payments must be made up in one lump sum, but that isn’t the only option. Typically, they can also be tacked on as an extension of the mortgage or stretched out over several payments.

About seven in 10 mortgages in the U.S. are federally backed, so most homeowners who need relief can find it. For those with a mortgage not covered under the CARES Act, it is worth calling the servicer to see what options are available. Most likely, they won’t be as generous as the federal ones.

“If you are still able to pay your mortgage, you should. If you are struggling, you should seek help,” Tetreault said.

Just as it did during the last recession, mortgage relief has drawn in scammers. Those who need mortgage relief should contact a HUD-approved housing counselor, she said.

Federal student loans, which represent about three-quarters of all student debt, were placed in an “administrative forbearance” that halted interest and principal payments until Sept. 30, said Penny Wang, a deputy editor with Consumer Reports. Borrowers should have seen relief, but if not, they can find out if a loan qualifies at studentaid.gov.

Automobile loans and credit card debt aren’t included in the CARES Act, but most lenders appear willing to provide help there as well. Borrowers need to be proactive in seeking out that relief.

“The good news is that there are accommodations being made by lenders. Most are allowing borrowers to reduce payments, waive annual fees or they are suspending or reducing interest rate charges,” Wang said.

Plans are worked out are done so on a case-by-case basis, she said. As with anything else, expect long wait times if calling by phone. And be sure to document all conversations, like those detailing what fees are being waived and how soon the missed payments must be made up.

The New York Federal Reserves estimates U.S. consumers had $3.9 trillion in borrowing capacity on their credit cards, of which they had drawn $893 billion heading into the crisis. That might make it tempting to pull out the plastic to support a pre-crisis level of spending in hopes of a quick rebound.

Bad move, Wang said. Instead, consumers who have lost income should cut spending as much as possible and work out relief plans with creditors.

“Try to avoid using them as an emergency fund. It will backfire in the end,” Wang said of credit cards.

The CARES Act allows those with retirement savings to take out up to $100,000 in some cases without the usual 10% penalty charged on those under 59 1/2 years of age. Wang advises against withdrawing retirement funds unless there are no other alternatives. In that case, she favors taking out a loan against a retirement plan.

Tetreault said those who haven’t lost income and see others struggling may feel another urge — to pay down debt as quickly as possible. She and Wang advise against that approach too, given all the unknowns.

“Beef up that emergency fund now,” Wang said.

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Coloradans rank fourth in nation for their amount of debt. Here’s how you can seek relief. - The Denver Post
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