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Widespread unemployment and economic hardships from COVID-19 will create a credit crisis that could further delay economic recovery.
As the nation slowly gets back to work over the coming months, millions of Americans will struggle to repay the debts that accumulated while they were jobless. Millions more will plunge into debt and suffer prolonged hardships. Once those unpaid bills become due — whether for rents, mortgages, medical expenses or student loans — these citizens will have to cope with lenders, credit card companies and others, all at the same time.
With 42.6 million Americans suddenly unemployed since mid-March, and expectations that economic hardships will persist for many workers and small business owners, our citizens will soon run severely short on lines of credit. These are the flight attendant next door, the single mom who’s an assistant hotel manager, and your friend who just opened a coffee shop. They will be at risk of falling further behind on their debts — first by weeks, then months and possibly years — inflicting a heightened state of fiscal instability.
The magnitude of the crisis
The coming credit crunch will be unprecedented in magnitude. It threatens to trigger a tsunami of delinquent debt, bankruptcies and foreclosures that will overwhelm our courts and undermine our communities and financial institutions, delaying economic recovery even longer. Tens of millions of low- and middle-income families could be decimated.
These people — so many already living paycheck to paycheck, with bill collectors lurking outside the door — are now searching desperately for lifelines. Fraudulent activity frequently follows consumer debt crises such as this. Predator marketers and various for-profit debt settlement companies will dangle promises of fast, easy debt resolution. Already, individual calls to the credit industry have skyrocketed, an ominous trend sure to grow.
As in the 2008 mortgage crisis, American families now confront two challenges: They must contact overloaded creditors and develop repayment plans. In the aftermath of the 2008 debacle, it became clear that borrowers in this predicament desperately required help. In response, the federal government funded counseling that provided comprehensive guidance and a trusted source of advice.
And as in 2008, today individuals and families need debt safety nets but don’t know where to turn for help. Even if hardship programs from lenders deliver temporary relief from monthly payments, these stopgap measures will fail to sustain long-term financial recovery. Strapped households will continue to face difficulty making well-informed decisions about options to repay creditors over the long haul.
Unless we combat this pending debt crisis with an approach that promises to be fair, comprehensive and unified, we’ll push an already vulnerable population off a cliff.
Navigating the financial crisis
What people suffering financial distress need more than anything else is sound financial guidance. Credit counselors — nonprofit experts who advocate directly on behalf of people in need — have the debt management tools American families need to navigate these coming financial challenges.
Credit counseling is a proven solution for sustainable financial well-being, as demonstrated by a study from the Ohio State University. Individuals guided by nonprofit credit counseling agencies paid down more debt, increased savings, and better improved their credit health than did those who went without a credit counselor.
In response to the COVID-19 challenge, the National Foundation for Credit Counseling, working closely with the Financial Counseling Association of America, has enlisted about 80 nonprofit U.S. credit counseling agencies, credit card companies and banks to launch a new, nationwide program for people in financial distress from the coronavirus. Leaders in the credit counseling sector coordinated closely with regulators, banks and creditors in developing a simple, specific scalable solution.
The central feature of the counseling emergency response program is an agreement to defer credit card payments for consumers suddenly unemployed. The next phase will enroll millions of individuals in debt management plans to provide sustainable long-term relief.
Credit counselors will steer their clients through multiple creditors, combining all obligations into a single payment, and restructure debt — averting potentially overwhelming demand on customer service channels. Counseled individuals will receive rapid support for all accounts at one time so they can get the information they need to make timely and informed decisions. These plans can prevent a wave of defaults and bankruptcies that could overwhelm our courts and financial system.
To ensure that the millions of Americans affected by the COVID-19 pandemic are able to work with a credit counselor, we need public support. Counseling should be integrated into the financial system at every turn, with lenders, regulators and state and local governments promoting centralized, easy access to counselors.
Federal regulators should take decisive steps to present credit counseling — and a single set of consistent guidelines — as the central approach for Americans running into financial hardship for both our current cataclysmic moment and the long term.