Published January 26, 2017.
What to do when you can't pay your bills.
When you know you can't afford to pay those PAST DUE notices, why bother to open them?
It's not unusual, experts agree: When people can't pay their bills, they stop opening them. As their debts pile up, so do their piles of tossed-aside mail.
But ignoring the problem only makes it worse, says Debra Jackson, who oversees STCU's Financial Relief Solutions program for credit union members. Can't pay your bills? Open them anyway, she says. Get on the phone, and start sending letters. Seek out resources, ask questions, and ask for help. Prioritize your expenses and make a plan.
Nobody sets out to ruin themselves.
The causes of financial hardship vary: illness, job loss (or wage reduction), divorce, a family member's death. Maybe a pattern of overspending has come to a head.
Even if you made mistakes that contributed to your situation, they were just that: mistakes.
"Nobody sets out to ruin themselves financially," Jackson says.
Regardless of the causes of the problem, it's essential to contact everyone to whom you owe money - before your accounts get into past-due mode. Many creditors offer hardship programs or will work out new payment plans.
Be honest, Jackson advises. Explain your situation. Let them tell you how they can help. You won't have been the first to ask.
After that, you'll need to customize a solution. It might involve an immediate personal fundraising push before your plan starts to take effect: Consider selling furniture you don't use or the piano nobody plays, or seek side jobs. Can you teach a class or tutor a student? Babysit on Saturdays? Get a roommate to help cover costs?And while financial counseling can be helpful, beware of scams. Educate yourself about the risks and benefits of "credit repair clinics" and "debt management plans."
A few more tips to keep in mind:
Protect your essentials.
As you embark on your plan to dig out from under your pile of bills, decide what you absolutely require to live and work. Housing payments, basic utilities (like electricity and water), food, transportation, and child care costs would fall under this category.
Contact any relevant providers to ask for help: Your energy company might run an assistance program, or your mortgage lender might have programs to help avoid foreclosures. Then seek out other resources to keep those needs met. Is it time to sell your car and buy a bus pass? Is your family eligible for government aid to help cover child care?
Cancel the nonessentials. Subscriptions, streaming services, giant data plans you don't need, and club memberships are probably not for you right now.
"Be honest. Explain your situation. Let them tell you how they can help. You won't have been the first to ask," Jackson advises.
Consider the variety of consequences.
Unpaid bills can damage your credit score. Other potential fallout from skipping payments can vary a lot, depending on the type of debt and how long it goes unpaid.
- The government, for example, wields special debt-collecting powers. If you owe taxes, student loans, child support, or other debt where the government's involved, you risk having your wages garnished, losing your tax refund, or going to jail (if you fail to pay child support).
- "Secured" loans also merit special attention. Secured debt is tied to a specific piece of property (collateral) you used to guarantee repayment. If you used your car or truck as collateral, you auto lender can repossess it. If you used your home, your mortgage lender can foreclose on it.
- "Unsecured" debt, on the other hand, can subject you to lawsuits filed by credit card issuers or medical providers. The court may order your wages garnished, which means your employer must start withholding part of your pay to send to creditors.
View bankruptcy as a last resort.
Bankruptcy doesn't eliminate all types of debt, and the consequences last for years. A Chapter 7 filing will stick to your credit report for a decade, making it difficult to get a home, a car, or insurance.
You also risk losing your personal property through bankruptcy.
"These should be the worst situations," Jackson says, such as when a two-adult family has irrevocably lost both sources of income.
"Not, 'Oh, I ran up $70,000 on my credit cards, and now I'm going to get a reset,'" Jackson says.
Don't count on consolidation.
In general, Jackson also discourages people from consolidating their debt - usually done by taking out a home equity line of credit - to pay their bills, especially credit card bills.
That's because it allows people to temporarily solve their problem without changing their behavior, especially when it was credit cards that led to trouble, Jackson says.
Fail to pay your newly consolidated debt, now secured by your house, and you could lose your home. Instead, address the root of the problem: Stop buying things on credit.
"It's really rare for someone to consolidate and then never use a credit card again," Jackson says.
Instead, consider using the "snowball" method to pay down credit cards, she advises. Aggressively pay off the smallest balance first (making minimum payments on the rest). Then, when it's paid off, put the amount you'd been putting toward the smallest debt toward the second-smallest one, in addition to Debt No. 2's minimum payment. And so on.
Know your rights when dealing with collectors.
The Fair Debt Collection Practices Act protects you from predatory practices, such as harassment, from debt collectors.
For example, it's illegal for them to call you at work if you ask them not to. In fact, they need to stop contacting you altogether if you ask them to - but do it in writing. The Consumer Financial Protection Bureau offers sample letters to send to collectors, plus more information about your rights.
Pick up these two great habits.
- Start making regular contributions to an emergency fund for the next time something bad happens.
- Become a budgeter, even if "budget" sounds like a dirty word to you now. Myriad free apps are ready to help, and some financial institutions have tools built into their mobile apps or online banking sites to help you create a budget that reflects real life. "At the end of the day," Jackson says, "you're going to be right back where you started if you don't get it under control."