When You Can't Pay Your Bills: Ten Things to Know

Having trouble paying your bills? Here's what you need to know when you're in financial trouble.

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Many Americans are in debt trouble, especially as the economy continues to lag and unemployment rates remain high. If you're struggling to pay your debts, don't ignore the problem. Learn all you can about your options for digging yourself out of debt and how to avoid scams that target people with financial woes. Then, take action. When unpaid bills start piling up, here are ten things to keep in mind.

1. All Debts Are Not Created Equal

If left unpaid, some types of debt have more dire consequences than others. (To learn why, see the "Secured Loans Deserve Extra Attention," section below.) What's more, the type of debt you have often dictates your options and your best negotiating strategies. For example, federal programs may offer relief to homeowners who are struggling to keep up with mortgage payments. (To learn about dealing with mortgage trouble, see Nolo's foreclosure topic.) When it comes to medical debts, some individual medical providers are eager to work with patients that cannot pay. (For ideas on handling medical debt, see Nolo's article Managing High Medical Bills.) And if you have student loans, it pays to learn about government programs that may provide relief. (To learn more about student loans and payment options, see Nolo's Student Loan & Tax Debt topic.)

2. Budgeting Is Key to Getting Out of Debt

If you have some income left over after you've paid all your basic monthly expenses, you may be able to dig yourself out of debt trouble. The path can be slow and arduous but, with hard work and diligence, you can be successful. Here are some options to consider.

Start by making a budget that includes all of your income and expenses. (For step-by-step instructions on how to make a budget, see Nolo's article How to Make a Budget and Stick to It.) Explore ways to reduce spending and expenses -- and if possible, increase your income -- then revise your budget accordingly. Next, using your budget as a guideline, come up with a realistic dollar amount that you can devote to paying your debts each month.

Be sure to prioritize your debts and expenses, listing those that are essential to pay (like the mortgage, the utility bill, and child support) and those that might be less important (such as department store charge cards or loans from family and friends). (For help in prioritizing your debts, see Nolo's article Which Debts Must You Repay?)

3. Secured Loans Deserve Extra Attention

Generally speaking, paying secured debts is more important that paying unsecured debts, so it's important to understand the difference between the two.

A debt is considered "secured" if a specific piece of property (called collateral) is used to guarantee the repayment of the debt. If you don't repay a secured debt, most states let the creditor take the property without having to first sue you and get a court judgment. Examples of secured debts include mortgages and home equity lines of credit (which are secured by your home) and car loans (which are secured by your vehicle).

An "unsecured" debt is not tied to a particular piece of property. If you don't pay an unsecured debt, the creditor must sue you and get a court judgment before it can take your wages or property to get paid. Examples of unsecured debt include medical bills and credit card debt.

Usually (but not always), secured debts take precedence over unsecured debts. If you don't want to lose your home to foreclosure, then getting current on your mortgage should be a priority. On the flip side, not paying your department store charge card bill for a while might be smart if it means you can make the payment on a car loan (especially if you need your car to get to work).

4. Communicating With Creditors Is Wise

Whatever you do, don't hide your head in the sand or sweep your bills under the bed. Even if you have no income, it almost always makes sense to contact your creditors and let them know your situation. Some creditors may be quite willing to work with you. For example, they might agree to a payment plan, allow you to skip a few payments and tack them onto the end of a loan term, or waive late fees.

The exception to this advice is if you are going to file for bankruptcy or are "judgment-proof" and don't plan to repay your debts. (You are judgment-proof if you have no income or assets that creditors can seize if they sue you and get a court judgment against you). Because you won't be working with your creditors in these situations, there is often no point in communicating with them. In fact, the Fair Debt Collection Practices Act (see below) gives you the right to demand that creditors cease making further calls. This will provide excellent protection against harassment, especially between the time you decide to file for bankruptcy and the date your petition is actually filed.

5. Credit Counseling Can Help -- But Be Careful

If what you really need is money management education or budget counseling, consider getting help from a credit counseling organization. These agencies can also suggest options for digging out of debt, provide housing counseling, and refer you to other agencies that provide specialized help. Some credit counseling agencies can contact your creditors to set up payment plans, or create an overall debt management plan.

If you do want help from a credit counseling agency, check out the company's credentials first. Not all agencies are legitimate -- some charge excessive fees, fail to perform promised services, or provide bad advice. (For information on finding legitimate credit counseling agencies, see Nolo's article Choosing a Credit Counseling Agency.)

6. Scams Involving Debt Management Plans and Debt Negotiation Services Abound

Many companies tout debt management plans or debt negotiation as the solution to everyone's financial woes. Companies that offer debt management plans work with the consumer and creditor to create payment plans. The consumer makes a monthly deposit to the debt management company, and these funds are used to pay creditors. Debt negotiation firms claim that they can get creditors to agree to discount a consumer's debt, often by a substantial amount.

Some of the companies offering these services charge excessive fees, provide bad advice, don't discuss alternative ways to deal with debt, make false promises, and sometimes even take your money and run. Scams involving debt management and debt negotiation services topped the consumer complaint list of many state attorney general offices in 2008. The proliferation of scams has prompted the Federal Trade Commission (FTC) to bring many lawsuits as well and to make a concerted effort to warn consumers about the potential for fraud. (To learn more about these services and how to avoid scams, see Nolo's articles Debt Management Plans and Debt Negotiation Firms.)

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