Coronavirus stimulus checks are coming — ​here’s how credit card debt could affect it

Debt collectors can seize your stimulus money to satisfy debt payments. (iStock)

The IRS is sending out stimulus checks as part of the Coronavirus Assistance, Relief and Economic Security (CARES) Act, and you may qualify for up to $1,200 per adult and $500 per dependent based on your income and dependency status for the 2018 or 2019 tax year.

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The agency started with taxpayers whose direct deposit information it has on file, and will send our paper checks to the rest.

But getting your stimulus money could be problematic if you owe on your credit cards, especially if a debt collector is involved. Here’s what to know about your stimulus funds and credit card balance.

Using your stimulus check to pay off credit card debt

Losing your stimulus money to debt collectors can be devastating, especially if you’re struggling and need the cash for basic necessities. However, if you’re still employed and haven’t experienced any financial hardship due to the coronavirus crisis, you may be wondering if you should use at least some of your stimulus money to pay off high-interest or collection debt.

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“Given the likelihood of continued economic turmoil in the near-term, hang onto your stimulus funds for the necessities,” said Jay Fleischman, an attorney at Money Wise Law who helps people with debt problems. “There will be time to deal with debt after you're back on firm financial footing.”

Even if you think your income situation is safe, it’s better to be safe than sorry.

Other ways to pay off credit card debt without reducing cash flow 

If you need your stimulus check for other expenses or you simply want more options to help pay down your credit card balance, here are some ways to do it without affecting your monthly budget:

  • Balance transfer credit cards: If your credit is in good shape—meaning your credit score is 670 or higher—you may be able to qualify for a balance transfer card with an introductory zero percent APR promotion. Depending on the card, you could transfer a balance from another card and get up to 21 months to pay it down interest-free. Just keep in mind that many of these cards charge an upfront balance transfer ranging from 3 to 5 percent of the transfer amount.
  • Personal loan: If you can’t get a zero percent balance transfer card, a personal loan could be a solid option, especially if your credit score is in decent shape. Depending on where you stand, you may be able to get a loan with a lower interest rate than what you’re currently paying. That said, your monthly payment may end up being higher than what you’re currently paying.
  • Dip into your emergency fund: In general, it’s best to keep your emergency fund for emergencies. But if yours is robust enough, you may be able to take some and apply it to your debt.

FED’S EMERGENCY RATE CUTS AFFECT YOUR CREDIT CARD — HERE’S HOW As you consider these options, think about your current situation and your future financial goals to pick the best one for you. Also, if your credit isn’t in great shape, take steps to improve your credit score for the future.

Debt collectors could go after your stimulus check

In general, debt collectors are expressly prohibited from garnishing payments from the government, including Social Security, disability and veterans’ benefits. However, the CARES Act doesn’t specifically state that stimulus payments are also exempt, according to USA Today.

State attorneys general have written to the Treasury Department asking Secretary Steven Mnuchin to ensure debt collectors can’t use emergency stimulus money to satisfy debts, and many states, including California, Delaware Massachusetts, Ohio, Texas and Washington, D.C. have created their own protections for residents.

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But in other states, your stimulus money remains fair game. “Understanding the laws in your state, as well as the procedures needed to trigger the necessary exemptions, can go a long way in knowing your level of exposure,” said Fleischman.

Also, consider withdrawing your stimulus money as soon as you receive it or redirecting it to another institution that hasn’t received a garnishment order. If you expect to receive a paper check, cash it instead of depositing it into your account.

“If possible, call the debt collector to work out a settlement or payment plan so you can protect your money as your financial situation improves,” Fleischman said. Also, consider consulting with an attorney to see if bankruptcy is a viable option.