When money is tight, it’s tough to pay your mortgage, car, or credit card payment. Some people think that paying a little bit will smooth things over and stave off collection efforts. But making a partial or “good faith” payment does not mean your creditor will go easier on you. Instead, if you pay less then the minimum, expect your creditor to charge you late fees, ding your credit, and eventually sue you for the entire amount you owe.
Understand Your Creditor's Interests
It is important to realize that your creditor is only interested in two things: making money and appearing profitable to its shareholders. When you pay less than your minimum payment, your creditor loses money, and frankly, shareholders don’t like it when creditors have a lot of bad accounts on the books.
Your creditor gets rid of the bad accounts by selling them to a collection agency (or by taking back your home or car) and then writing the loss off as a bad debt. Your credit report then shows your debt as “charged off.” (Learn more about charged-off debts.) Even so, in most cases you still must pay what you owe (though not in all cases.) Overall, however, throughout this process your creditor does not care whether you are doing your financial best or not. Either you make your minimum payment or your creditor will take steps to make you do so.
Negative Consequences of Good Faith Payments
The simple fact is that the only way you can get in the good graces of your creditor is by paying what you owe. If you can’t, it’s important to understand that making good faith payments can be more harmful than you might think.
Partial Payment Has the Same Consequences As No Payment
In most situations, making a partial payment is the same as making no payment. Here's what happens if you make partial or no payment:
It Hurts Your Credit
Paying only a part of your monthly payment means you still owe a balance the next month. After 30 days, your creditor reports the payment as late. For credit purposes, it is the same as not making a payment at all. Worse yet, your creditor will continue reporting late payments as long as you continue owing money for past months.
You Get Charged Late Fees
Not only do the payments stack up, your creditor charges you late fees when you make a partial or good faith payment. As the fees add up, each month it gets harder to dig out of the hole of debt.
You Get Slapped With a Lawsuit
Once you miss all or a part of a payment, your creditor can sue you for the entire balance. This is because your credit contract requires you to make monthly payments on a certain date. If you don’t do so, you break or “breach” the contract.
When Partial Payment Is Worse Than Making No Payment
Sometimes making a partial payment is worse then making no payment at all. In particular, making a good faith payment can give your creditor more time to sue. Here's why.
Your creditor only has a certain amount of time to sue you in court. This period, called the statute of limitations, starts running when you stop making payments and varies depending upon what state you live in. For example, in California the statute of limitations for a written contract is four years from when the contract was broken. This means that a creditor must file a lawsuit within four years after you stop making payments. If you make a payment after you haven’t done so in awhile, the statute of limitations may begin running all over again giving your creditor additional time to sue you. (Learn more about reviving the statute of limitations.)
Before Making a Good Faith Payment
Before making a partial payment, it’s a good idea to consider all of your options first.
Consider Calling Your Creditor
You might want to find out if your creditor has a program that will help get you back on your feet. Some creditors allow you to skip a few payments or lower your payment amount if you lose your job or experience an unexpected emergency. If the creditor offers you such a program, it is wise to get the terms in writing. Without it, a creditor may later deny entering into an agreement with you. While many creditors are reputable, the reality is that some collection departments try to get as much money from you as possible before they sue you for the entire balance.
Should You File Bankruptcy?
If you can’t bring your balance current in the near future, making a good faith payment may be an exercise in throwing good money after bad. Instead, it may be a better idea to find out if you qualify for bankruptcy. If you do, the cost of filing may be offset by the fact that you can discharge many, if not all, of your other debts as well.