June 13, 2018
Unbiased Financial Information Provided by Financial Finesse
You sit down with the bills, pull out your checkbook, and discover there's not enough money to pay everyone. What do you do?
Decide Who to Pay First
Of course you want to pay all your bills, but if the money just isn't there, you'll have to pay some and put others aside for now. Determine which debts are most important to pay today:
- Some bills, like rent and utilities, are more important than others because they are necessities.
- Some debts are important because they would trigger repossession of collateral that you can't do without. An example would be the car you use to get to work.
- Some debts are important because they bear higher interest rates. When choosing among unsecured debts, like credit cards, you get more bang for your buck by making payments on higher-interest debt.
Know What to Expect If You Don't Pay
Several things could happen if your payments are made late or not at all:
- Late and missed payments are noted on your credit report. This could affect your ability to get credit in the future. You will also likely accrue late fees.
- Failure to pay the amount required when due could trigger legal action. If the loan is secured by collateral, like your car, it could be repossessed. If it's a home mortgage, the lender could start foreclosure proceedings.
- Creditors may apply to the courts for permission to garnish your wages or access the money in your checking or savings accounts.
Be Proactive in Dealing with Creditors
Many experts advise consumers to call their creditors as soon as they know they will be making a payment late or missing a payment altogether. Explain the situation and try to devise a payment plan. Try to pay something towards the debt to show "good faith." However, don't assume that your attempt to work something out makes everything all right. The creditor need not accept late or partial payments, does not have to negotiate with you, and may initiate legal action against you.
The bottom line is, creditors want to minimize loss. If you have a lot of equity in your home and you miss a couple of mortgage payments, the lender may want to foreclose since it knows it will be paid. On the other hand, if there's little equity in your home or other collateral and your inability to pay is due to a temporary condition that will be remedied soon (such as short-term unemployment or a single, large emergency expense that threw your finances off track for a short time), the lender may hold off on legal action.
If foreclosure or repossession seems unavoidable, you're better off selling the collateral yourself or deeding it to the lender in lieu of foreclosure or, in the case of a car, handing it over to the lender voluntarily. You still lose the property, but the lender doesn't suffer the costs of foreclosure or repossession and the mark on your credit report may not be quite as bad.
For student loans, you may be able to negotiate a deferral or forbearance. In some very limited circumstances, you may qualify for cancellation.
Credit Counseling Can Help
Professional credit counselors work on consumers' behalf to negotiate a manageable payment plan with creditors. Though creditors are not required to agree to the plan, they often do because they are familiar with such programs and see reduced payments as a more attractive option than no payments at all, which might be what they'd get if you filed bankruptcy. Many creditors will stop assessing late fees or interest charges if you're paying regularly through a "debt management plan." You can find a credit counseling office near you by calling 1-800-388-2227 or visiting the National Foundation for Credit Counseling (NFCC) on the Web.
A Word About Bankruptcy
For some folks, bankruptcy may be the best option. There are different types of bankruptcy; depending on whether you file under Chapter 7 or Chapter 13, you may or may not have to pay anything toward your debts and you may or may not get to keep your property. A bankruptcy attorney can explain your rights. Filing for bankruptcy should be considered a last resort, when absolutely all other attempts to remedy your financial situation have failed.
Set Yourself Up for Future Success
Many debt problems are caused not by unavoidable catastrophes but by poor money management. Follow these smart money moves to avoid missing bill payments in the future:
- Live below your means. Your spending should never exceed your income.
- Contribute to a savings plan regularly. Accumulate the equivalent of three to six months' expenses in an emergency cash reserve.
- Use credit sparingly. Just because a lender is willing to extend you credit or a loan doesn't mean you should take it.
Planning is the key. Budgeting and the proper use of credit can help you avoid a scenario where you don't have enough available cash to pay everyone. If you do find yourself in such a predicament, keep a clear head and develop a plan to get yourself on firmer financial footing.