How to Rebound From Natural Disaster Debt

Meet immediate needs by applying for aid and seeking help from creditors; then choose a long-term debt-payoff plan.
How to Rebound From Natural Disaster Debt

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Natural disasters can uproot lives — and upend stable finances.

If you need to flee your home, you could spend hundreds a day on lodging, meals and gas. You might miss work and lose wages. And when you return, you could owe a large deductible before insurance covers damage. Even if you have savings, credit card balances can pile up quickly.

Here’s how to respond if a natural disaster lands you in debt.

Take advantage of aid

Tapping relief resources can stretch your money and hasten recovery. Register as soon as you can to get aid and help coping.

Here are a few options to explore:

  • On DisasterAssistance.gov, you can check your eligibility and apply for grants and other aid.

  • The Federal Emergency Management Agency also offers low-interest loans. Although the program is run by the Small Business Administration, you need not be a business owner. SBA disaster loans are the basic form of federal assistance of private property damage not fully covered by insurance.

  • The nonprofit credit counseling agency Money Management International offers free financial recovery counseling through Project Porchlight. It can provide a custom recovery plan and help you stay in good standing with creditors.

Seek help from creditors

You might be able to skip or reduce a payment, avoid late fees or defer a loan. Go into the call with a clear idea of your current budget. Creditors might offer some flexibility, but it’s not likely to last for long, and they’ll want to know when you expect to catch up.

The response will vary by creditor, and even among representatives at the same company. Don’t be afraid to call again.

Make sure you understand the terms of the relief. If you skip a loan payment, for instance, what is your new end date and how much extra interest will you pay? Always keep notes about the date and time of your call and name of the representative, and try to get the deal in writing.

You might also benefit from an “affected by a natural or declared disaster” code on your credit reports. You can ask for this, or the credit bureaus may proactively apply it. Keep an eye on your credit scores and reports in coming months.

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Pick your long-term strategy

Gathering aid and staving off creditors gives you some breathing room to assess your new financial reality.

Add up credit card, medical and personal loan debts, then consider whether you can pay them off within five years while covering living expenses. If not, debt repayment might endanger basics such as paying your mortgage and saving for retirement.

If you can meet a five-year timeline

  • You might be able to accelerate your payoff with a DIY approach such as the debt avalanche method, in which you pay extra money toward your debts in order of interest rate, highest first.

  • If you have good credit, consider debt consolidation through a personal loan or a balance transfer credit card.

  • If it’s going to be tight, contact a nonprofit credit counseling agency about a debt management plan. These programs can slash credit card interest rates, making it easier to clear debt in three to five years.

If you can’t meet a five-year timeline

Consider bankruptcy and consult a bankruptcy attorney; most offer a free initial consultation. Chapter 7 bankruptcy forgives many debts, and you can generally complete it in fewer than six months. Your credit scores will start to rebound soon after. If you don’t qualify, Chapter 13 lasts no longer than five years.

Include your credit in your recovery plan

There are also a few simple ways you can get your credit back on track while you’re setting up a long-term plan:

Pay down balances

The amount of your credit limit you use has a big influence on scores. The good news is card issuers report to the credit bureaus every month. As you pay down debt, your score will reflect your progress — especially once you get the balance below 30% of your limit.

Make on-time payments

Unfortunately, a missed payment stays on credit reports for seven years. If you can’t persuade your creditor to stop reporting disaster-related delinquencies, focus on paying bills on time going forward. Payment history has the biggest effect on scores, so piling up positive information will start to offset older negatives.