What to Do If Relief Assistance and Insurance Payouts Aren’t Enough

Depending on the scope of the disaster and loss suffered you may find that assistance and insurance payouts don’t cover the entire cost of repairing and/or rebuilding your home.  There are a few things you can do to begin figuring out how to manage the shortfall. 

First, remember to contact your creditors to let them know about your situation.  Your home lender, credit card companies, utilities, and other service providers or creditors may give you extra time to recover from your disaster and pay your bills.  In the meantime, if you need to begin thinking about how you can pay bills, consider the following sources of potential funds:

  • Personal savings and investments

The most obvious financial resource is your own personal savings – money you have accumulated in your personal savings or checking accounts, money market funds, CDs, mutual funds, stock and bond investments, etc.  Call or visit your local bank branch to get your current account balances.  This may be a time to dip into your emergency savings if you have built up a reserve. 

If your checking and savings accounts are not adequate and you have other investments (i.e. CDs, mutual funds, money market funds, stocks and bonds), you might want to consider tapping into, or liquidating, those assets.  It is always a good idea to work with a financial professional before liquidating any assets to find out what penalties you may have to pay and what the tax implications may be for cashing out the investment.  Click here for a helpful piece on how to identify and work with a financial professional.

  • Outstanding income owed to you

Perhaps you have money owed to you that you have not collected up until now.  Perhaps it is a loan to a friend, business expenses that you have not filed a reimbursement for, or child support or alimony.  Take a few minutes to think through whether or not there are sources of income that you have not pursued up until now.  Ask a trusted friend, family member or lawyer (if necessary) to help pursue getting payment. 

  • Your home equity

Depending on the condition of your home and extent of the damage, you may be able to talk with your mortgage lender about tapping into the savings you have built up in the home (by paying down a portion of the mortgage each month) with a home equity loan.  It’s important to realize that getting a home equity loan is just that – a loan – that must be paid off, with interest, over a set period of time.  The reason that a home equity loan may be an attractive option is because the interest rate is typically much lower than alternative sources of cash (i.e. credit cards) and you may be able to deduct the interest on the loan from your taxes.  However if you default on the loan you may also risk losing your home.  You really need to think through all the implications before taking on a home equity loan.  That said, it may represent the lowest-cost source of funds to help you in this stressful time.  For more information on how to think about, and be able to, stay in your home during a financially difficult time, click here. 

  • Your 401(k) or retirement plan savings

Saving for retirement is an important financial priority. But sudden property loss or damage is an extreme situation.  If you are deeply in debt, cannot meet your living expenses or are considering filing for bankruptcy, you might want to talk with a financial professional about borrowing against your 401(k) or retirement savings plan. If you have a retirement savings plan through your employer, you may be able to borrow up to 50% of the plan’s balance.  Because you are taking out a loan against your savings, and withdrawing your savings (which is generally not recommended because you will face early withdrawal penalties and miss out on the benefit of compounding interest earning money for your future), the loan will be charged interest. The interest rates for these types of loans are typically very low, especially compared to the interest you are paying for your credit card debt. Other factors to consider are:

you will have to pay the loan off in 5 years;

you will have to repay the loan in full if you are fired or leave the company;

there may be a loan application fee or maintenance fees

It’s a good idea to consult with a financial professional if you are considering this option.

  • Refinancing your home loan

As long as your home wasn’t completely destroyed and depending on the extent of damage, refinancing a home loan may be an option and may represent the best, most affordable source of funds to help meet your current financial needs.  First contact your lender and explain the situation to see if it’s even possible to refinance your mortgage.  If you could get a more favorable interest rate by refinancing, you can save money on your home loan and free up more money each month that you previously paid on the loan.  While you may have to incur some up front out of pocket costs to refinance (such as application fees, closing costs, etc.) your lender might be willing to waive or reduce some of these fees, and the savings you may realize with your new lowered monthly mortgage amount may more than offset those costs. You can then use the money to pay for repair work and meet living expenses.  Click here to learn more about how and when to consider refinancing your mortgage.

  • Your life insurance policy

If you have a whole or universal life insurance policy, it has a cash value which you can use to get a loan or withdraw some cash for living or rebuilding expenses. Keep in mind that your insurance company may charge fees for the loan or cash withdrawal, that a portion of the cash value may be considered taxable income (meaning you have to pay taxes on it) and that you need to continue paying the policy premium so that the policy does not lapse.