When you do not have enough money to cover your family’s basic living expenses and pay all your creditors, you face some difficult financial decisions.
When family income is reduced, your spending habits must change. The sooner you change, the more likely your financial problems can be lessened. Your family should be part of the decision-making process, since their cooperation is essential to carry out the plans.
When your bills exceed the money available to pay them, you will have to develop a revised payment plan in order to repay your debts. After you have a plan, you will have to contact the people to whom you owe money - your creditors - and explain your situation. Creditors will usually work with you to adjust your payments because they want their money.
Your past experiences with creditors are important. If you have consistently paid bills when due, your creditors will be more cooperative than if you were late or did not make regular payments. Creditors are in the business of lending money and/or providing services. They want to keep your business, but they also want to get paid.
Before you can talk to your creditors, you need to take a hard look at your situation and decide how much and when you can pay. First, answer the following questions:
You are legally obligated to pay all of your creditors. If you cannot pay all your bills, you must decide how much to pay to which creditor. One way is to divide available money and pay each creditor a share of what you owe. This is probably the fairest way, but it does not always work because every creditor must agree to reduce the amount they receive and extend the payment period.
A second method is to prioritize or list your creditors starting with the ones who will receive the most money. Think about the worst consequences for your family if certain debts were not paid or if less were paid than the amount due. Answering the questions below will help you decide.
Once you have calculated how much money your family has for monthly living expenses and for paying off debts, decide how much you can pay to each creditor, based on the priorities you determined by answering the previous questions. Work out a repayment plan that shows how much you plan to pay each creditor.
Now you are ready to contact each of your creditors to explain your family situation. You will need to tell them how much you are able to pay and when you will be able to pay it. Some businesses, such as utility companies, have special counselors for customers who cannot pay their bills.
Once you have gathered the information you need, contact each creditor, explain your family’s situation, and work out a solution. Be prepared to explain the following:
Visit the loan officer at your bank or credit union, the credit manager of local stores and the budget counselor at the utility company. Do not forget creditors like your dentist, physician, clinic and hospital. Contact out-of-town creditors by phone or letter. If you phone, write down the name and title of the person to whom you talked. Follow the conversation with a letter summarizing the agreement between you and the creditor. Keep copies of your correspondence as well as any reply.
A sample “Letter to Creditors” is provided on the PDF to use as a guide when writing to creditors. You may also use it as an outline of what to say when talking to a creditor. As you negotiate with each of your creditors, do not agree to any plan simply to get off the hook. Be sure you will be able to follow through on the agreement. Establish a payment rate that is acceptable to both you and the creditor.
Some alternatives to consider when negotiating with your creditors include:
Not all creditors will be willing to accept alternatives. However, they will be more likely to work with your family if you contact them before they contact you. They all want their money and would rather get some money on a regular basis than have to begin collection procedures.
If you fail to follow the plan that you and your creditors agreed upon, you will hurt your chances of getting future credit. Tell your creditors about any changes that may affect your payment agreement. If you owe a large amount of money and your creditors will not accept reduced payments, you may have to consider more extreme alternatives such as credit counseling. To find an accredited credit counselor visit the National Foundation for Credit Counseling website at http://www.nfcc.org. Expect to pay a fee for this service.
If you miss a payment, you will be faced with increasing pressure to pay. First you will receive a letter reminding you that you missed a payment and asking you to pay promptly. After that, you may receive a more direct letter demanding payment or you may get a phone call.
If the bills are still not paid, they will probably be turned over to an independent collection agency. While the agency will try to get you to pay, the law protects you from certain actions. They cannot use abusive language or threaten you with violence. They cannot call you at unusual hours or threaten criminal prosecution. And, they cannot discuss your financial situation with others.
If you do receive harassing contacts from creditors, you may write a letter requesting that they stop collection contacts. This letter is called a cease letter and should outline the objectionable behavior of the collector’s employees. A sample cease letter is provided in the PDF. Keep a copy of this letter for later reference.
Here is what to do if you receive a call from a creditor or a collection agency:
Creditors can take several kinds of legal action against you. These actions are often written into the sales contract you signed. If you fail to make payments, you will receive letters from a creditor’s attorney or collection agency warning you of the intended action.
All of these actions are very serious and could jeopardize your ability to get credit in the future. You can reduce your chances of being harassed by creditors or collection agencies by communicating with your creditors and working out solutions for debt repayment early.
Remember no matter how bad your situation may be, do not ignore your bills and creditors. Prompt action is very important; let your creditors know you are having trouble before you miss payments and the situation becomes worse.
Once you have worked out a repayment plan, follow through with it and make the payments you promised to make. If you fall behind on your new commitments, creditors will be less understanding. If you fail to make the payments, creditors may hire a collection agency to make you pay.
Pretending you have no money problems will not make the problems go away. You and your family must face the situation honestly. Openly discuss spending decisions with all family members. This will help everyone realize that changes and sacrifices must be made for your family’s plan to be successful.
If you find yourself “over-extended” and you have tried financial counseling, budgeting and reduced payments and still cannot make headway on debts, bankruptcy may become an option worth investigating. Bankruptcy is good at wiping out credit card debt, but you may have trouble eliminating some other kinds of debts, including child support, alimony, most tax debts, student loans and secured debts. In addition, filing for bankruptcy brings long-term consequences for your financial situation and credit rating. It also affects your creditors.
Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcies can generally be described as “liquidations” or “reorganizations.”
In 2006, a new bankruptcy law went into effect which changed the requirements for people considering bankruptcy. All debtors now have to get credit counseling before they can file a bankruptcy case, and additional counseling on budgeting and debt management must be completed before their debts can be wiped out. Some filers with higher incomes are not allowed to use Chapter 7, but instead have to repay at least some of their debt under Chapter 13.
If you are considering bankruptcy, contact a lawyer experienced in bankruptcy proceedings. The lawyer can help you prepare necessary documents and file with the court. Discuss attorney and court fees at the first appointment because costs vary.