To choose the best options when you can’t pay your debts, you must first assess your financial situation. Start by doing the following:
At that point, you can evaluate the various options and choose the best one for you. Here are some things to consider and options that might provide relief.
The type of debt you owe will determine what collection actions your creditors are allowed to take and how much time it will take.
Secured debt, such as mortgages or car loans, give the creditor special rights to collect from property that you have pledged as collateral for the loan. If you don’t pay a secured debt, the lender can take steps to collect from the pledged property through foreclosure or repossession.
Unsecured debt, such as most credit card debts, generally require the creditor to file a lawsuit against you and obtain a judgment before it can take drastic collection action such as garnishing your wages or bank account or placing liens against real estate.
Government debt, such as taxes, domestic support, or student loans, are unsecured but they give the creditor special collection rights. In most cases, the government can take your tax refunds to pay the debt and it can garnish your wages or social security without first getting a lawsuit judgment.
If your financial difficulties are temporary, you may be able to get back on your feet with more time to catch up on payments or a temporary reduction in payments. But if your situation is permanent or long-term, you will need a more permanent solution which will reduce or eliminate your debts entirely.
Each state has exemption laws that protect certain of your assets from creditors. (Learn more about exemptions and creditors.) If you file for bankruptcy, exemption laws also protect your assets from the trustee. It is important that you know which of your property is exempt so that you understand which items are at risk for collection and which are safe. This will help you decide which assets, if any, you want to use to pay your debts. To learn more about exemptions in your state, see Nolo’s Bankruptcy Exemption section.
Depending on the type of debt you owe and the exemption laws available to you, your income may be protected from creditors in whole or part. To find out whether your income is at risk or to what extent, see the Nolo’s Wage Garnishments and Attachments.
Certain income sources, such as social security may have special protections that extend to funds directly deposited into your bank account. For more information, see Protections for Social Security Funds in Bank Accounts.
Here are some options to consider.
Do nothing. Generally this is only an option if you are judgment proof, which means that your creditors, even if they sue and get a judgment against you, will not be able to collect from you. In most cases, all of the following must apply to you to make you judgment proof:
Debt consolidation loans. If your situation is caused by high credit card payments, you may be able to alleviate your burden by taking out a debt consolidation loan at a lower interest rate to pay off all of your credit cards. To learn more, see Debt Consolidation: Pros and Cons.
Negotiate with creditors. You may be able to get some relief by negotiating with your creditors directly. Different types of debt have different options. You can reduce or temporarily suspend mortgage payments under the government modification programs, or lower your credit card payments or interest rates by reaching an agreement with your credit card lender. You don’t need a debt settlement agent to contact your credit card lender for you. For more details, see Strategies for Negotiating With Creditors.
File for bankruptcy. If reaching individual agreements with your creditors is impractical, you need more time to catch up on secured debt, or need to stop a wage garnishment, bankruptcy may be the best solution. To find out more about bankruptcy generally, the different bankruptcy options available, and the requirements for each type of bankruptcy, see What is Bankruptcy?
Apply for a student loan flexible payment plan. If you can’t make your student loan payments, there are a variety of options available to you. In most instances, you need to take action before you fall too far behind. The options differ based on the type of loan you have. Consolidation might help but it might also limit your options. Contact your lender and read Options for Repaying Student Loans to learn more.
Get help from family or friends. For most people, this is a short term option. However, it may be easier to get help from family or friends if you have a plan to deal with your debt. For example, family might be more likely to pay your bankruptcy attorney's fees, or help you out with a payment to rehabilitate your student loans which then enables you to get on a better payment plan, as opposed to helping you make payments every time you fall behind.
Consult with a lawyer. If you still need help deciding which course of action is best for you, you can consult with a debt relief lawyer for more information. To find out what types of debt relief lawyers there are and how to find a lawyer for your particular problems, see Nolo’s section on Debt Relief, Debt Settlement and Consumer Lawyers.
When you are in a difficult financial situation, you are particularly vunerable to debt relief scams or collection tricks. To find out more about what to avoid, see Options to Avoid When You Need Money and Debt Settlement and Negotiating with Creditors.