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 alternatives and choose the best one for you.
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 debts, like mortgages and car loans, give the creditor special rights to collect from property that you've 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 debts, 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 actions. Once the creditor has a judgment, it might be able to garnish your wages, levy your bank account, or place liens against real estate you own.
Government debt, like 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 might 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'll need a more permanent solution to reduce or eliminate your debts entirely. Debt settlement or filing for bankruptcy might be appropriate for your situation.
It’s more important to pay some debts than others. If you’re having trouble keeping up with all of your bills, figure out which ones are high-priority debts and be sure to make those payments first.
High-priority debts are secured by collateral that you want to hang onto, like a house or a car. Certain unsecured debts are also high priority, like utility bills, child support, and federal student loans in some cases. After all, if you don’t keep up with these kinds of debts, a creditor might foreclose on your home, repossess your car, or shut off the utilities. The IRS can intercept your income tax refund to collect a defaulted federal student loan. You could potentially go to jail for unpaid child support. Don’t pay low-priority debts unless you’ve already paid the high-priority ones, even if your creditors insist that you do so.
High-priority debts ordinarily include:
Some debts straddle the line between high and low priority. When deciding whether to pay these debts, consider various factors, like your relationship with the creditor and whether the creditor has initiated collection efforts. Medium-priority debts generally include:
A low-priority debt is one that doesn’t have immediate or devastating effects if you don’t pay. While paying these debts is a desirable goal, they're usually not a top priority. (Remember, though, that failing to pay a debt causes it to stay on your credit report for seven years.)
For example, low-priority debts typically include:
Each state has exemption laws that protect certain of your assets from creditors. If you file for bankruptcy, exemption laws also protect your assets from the trustee. It's important you know which of your property is exempt so that you understand which items are at risk for collection and which are safe. You can then decide which assets, if any, you want to use to pay your debts.
Depending on the type of debt you owe and the exemption laws available to you, your income might be protected from creditors in whole or part. Certain income sources, like Social Security, may have special protections that extend to funds directly deposited into your bank account.
Here are some options to consider.
Generally, doing nothing is only an option if you're 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:
You might be able to get some relief by negotiating with your creditors directly. Different types of debt have different options. You could be able to reduce or temporarily suspend mortgage payments with a forbearance or loan modification. You might be able to lower your credit card payments or interest rate by reaching an agreement with your credit card lender.
Once you know what you can afford to pay each month, call your creditors. Let them know what's going on—maybe you suffered a job loss, went through a divorce, had medical problems, or other financial troubles—and ask for help. Be aware that, in some cases, if your debt is settled for less than you owe, the amount of the canceled debt is taxable. The IRS generally considers canceled debt of $600 or more as taxable and settling debts for less than what’s owed can increase your tax liability depending on your tax bracket and the canceled amount.
If you decide to go this route, be sure to work something out with each of your creditors. If you negotiate a payment plan with only some of your creditors, the other creditors can sue you and essentially negate whatever benefit came out of your successful arrangements. And if you do end up filing for bankruptcy, which is not uncommon, the fact that you paid off some of your debt won’t benefit you at all.
You don’t need a debt settlement agent to contact your creditors for you.
If you’re not successful in your efforts to work out realistic solutions with your creditors—or if you feel you can’t handle the negotiations yourself—consider getting help from a reputable and accredited nonprofit credit counseling agency. The National Foundation for Credit Counseling website is a good place to start looking for one. Credit counseling agencies can provide money management education, budget counseling, debt counseling, housing counseling, and referrals to other agencies that can help. Credit counseling agencies may also be able to contact your creditors and create a debt management plan.
Remember, though, if you pay an agency to help with your debt problems, you’re spending money that you otherwise could have used to repay your debts. Figure out whether the amount the credit counseling agency charges for its services makes sense. If you pay more for debt assistance than you save through reduced interest rates and discounted principal, then you're essentially just adding to your debt load.
Also, before you use a credit counseling agency, do some research. Not all agencies are legitimate and some charge excessive fees, fail to perform promised services, or sign you up for a debt management plan without explaining other options.
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 might be the best solution.
If you can’t make your student loan payments, a variety of options are 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 or servicer to learn more.
For most people, getting assistance from family or friends is a short-term option. But it might be easier to get help from family or friends if you have a plan to deal with your debt. For example, your family might be more likely to pay your bankruptcy attorneys' fees or help you out with a payment to rehabilitate your student loans, which then enables you to get on a better payment plan, instead of helping you make payments every time you fall behind.
If you need help deciding which course of action is best for you, consider consulting with a debt relief lawyer to get more information. If you’re considering filing for bankruptcy, talk to a bankruptcy attorney.