Valerie Vincent, Tucker, Jeanette A.
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.
During a crisis or anytime 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 because 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 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 they were paid less 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:
Do not forget creditors, like your dentist, physician, clinic and hospital. Contact creditors by phone, email or letter. If you phone, write down the name and title of the person to whom you talked. Follow the conversation with a letter or email 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 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.
City, State, ZIP
Re: Account #:
Name on Account
Regular Monthly Payment
To Whom it May Concern:
To date I have remained current with the monthly payment on the account listed above. My financial situation has recently changed, and I am unable to continue to pay this amount. Briefly describe financial hardship. For example, I have been laid off (illness, disaster, etc.), and my current income covers only my basic living expenses.
My intent is to honor my obligation with you. I propose paying $XXX per month for the time being. I will contact you when my financial situation improves, and I am able to increase this amount.
Thank you for your patience and assistance with this matter. Please contact me in writing at the address above by insert date two weeks from date of letter with your response.
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 notice 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. Also, 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 on the next page. Keep a copy of this letter for later reference.
Name and address of collection agency
Attention: (name of person in charge of account)
Re: Account #
This is to confirm our conversation on (list date) regarding the account listed above. In accordance with the Fair Debt Collection Practices Act, Section 805(c), this letter is your notification to “Cease and Desist” any further communication concerning the above-mentioned debt.
(If there are specific harassment complaints, list them here.)
Your failure to comply with this request will result in charges against your company and any employee attempting to collect this debt.
I appreciate your immediate cooperation.
Your Printed Name
(Send this letter via certified mail with a return receipt.)
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.
What a creditor can do if you fail to pay your bills:
All 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 that 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 “overextended” 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.”
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.
Bucci, S. (2008). Credit Repair Kit for Dummies.
Deciding Which Bills to Pay First. www.extension.org
In Over Your Head. (2009) Ohio State University Extension.
Revised by: Valerie Vincent, LSU AgCenter
Adapted by: Jeanette A. Tucker, Ph.D., Professor and Extension Family Economics Professor, LSU AgCenter (Retired)