Despite our best financial planning and efforts to reduce spending, sometimes the unexpected arises and places us in a difficult financial situation. The fear of not being able to pay your bills is unfortunately one that many people in the United States and around the world will face. If it appears that there is not sufficient money coming in to cover your bills, you should not throw in the towel. While it may seem like nothing can be done, this is one of those times that you need to review your rights and figure out how to proceed with the lowest impact possible on your credit score. Below are some key things to keep in mind in case you are unable to pay your bills.
Communicate the situation with creditors.
If you can’t pay your bills, the worst thing you can do is to pretend that that they do not exist. Even if you have absolutely no money, you should contact your creditors to explain the situation and try to reach an alternative agreement. Many creditors will work with debtors to keep their business rather than let the account go to collections. Some creditors could offer a new payment plan that is more feasible, and others will actually allow debtors to skip a few payments so that they can get back on their feet. At the very least, creditors will typically waive late fees if they are contacted beforehand with a warning that the bill will come in late.
Figure out the consequences of nonpayment.
Many people do not realize that not all debt is created equal. In other words, nonpayment on some debt will incur more harm than others, so it is important to figure out the best way to disseminate funds. The type of debt that someone cannot repay will largely dictate the negotiation strategies available. Federal debt often comes with relief programs, particularly for homeowners who suddenly cannot afford their mortgages. Medical bills tend to be highly negotiable, and providers will eagerly work to figure out a solution. Sometimes, government programs can help to provide relief from student loans.
Secured debt can have more dire consequences than unsecured debt. A debt is considered secured if it is backed by collateral. In this case, nonpayment will result in confiscation of that collateral. In most states, creditors do not even need a court judgment to collect the collateral. The most common secured debt includes mortgages, car loans, and home equity loans. For unsecured debt, creditors must sue the debtor before they can take wages or property.
Understand the limitations of debt collectors.
If you repeatedly fail to make payments, then creditors may turn the debt over to a collector. Individuals who do not plan to file for bankruptcy may want to try working with these collection agencies. However, it is not uncommon for debt collectors to become annoying or even abusive, and it is important to understand debtors’ rights. The Fair Debt Collection Practices Act places many limitations on collection agencies. Collectors cannot harass debtors or use abusive language. Furthermore, they are restricted from making false or misleading statements, and they cannot add unauthorized charges to an account. In addition, the act prevents collectors from attempting to contact people at unreasonable times. Individual states may also enact further protections.
When individuals feel that a collector has broken the law, they should document the violation, inform the collection agency, and file a complaint with a consumer protection agency. If the abuse continues, individuals may be able to sue for damages.
Know that credit repair clinics cannot work magic.
Repairing a damaged credit score requires patience and diligence. While there are many companies that say they can secure a credit card or a loan for individuals with bad credit and quickly raise their scores, these companies are legally limited to doing only what people themselves can do for a small price. A handful of companies could actually put people at risk by using underhanded tactics. Instead of wasting money on these companies, individuals are better off reading and following a quality guidebook for repairing credit.
Understand that debt consolidation can help, but not always.
When people have difficulty paying back their unsecured debt, they may consider a consolidation loan. In essence, this loan lumps all unsecured debt into a single pile and then secures it to a home. Individuals may be attracted to this option because it can significantly lower their interest rate, especially when compared to credit cards. In addition, having debt in a home equity loan or a second mortgage often comes with certain tax advantages. However, the decision should not be taken lightly. If you cannot repay a consolidation loan, you risk losing your home. In addition, points and fees associated with the loan are often high, and the repayment terms are typically not favorable. Individuals should speak to a financial professional about how much money they would actually save with such a loan and ensure that they will not be in a similar default situation in the future.