Options for Debt Relief: What to Do If You Can't Pay Your Debts

If you're struggling with debt, learn about your options to get debt relief.

Updated by , Attorney · University of Denver Sturm College of Law

If you can't pay your bills and need debt relief, you should first assess your financial situation. Then, you can choose the best option for your situation.

Start by doing the following:

  • figure out if your financial difficulty is short or long term
  • determine whether exemptions protect your property, and
  • learn about your state's wage garnishment limits.

You can then evaluate the various alternatives and choose the best one for you, which might include negotiating with your creditors or, in some cases, doing nothing at all.

Is Your Financial Situation Temporary or Long Term?

If your financial difficulties are temporary, you might be able to get debt relief by getting 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 debt-relief solution to reduce or eliminate your debts entirely. Debt settlement or filing for bankruptcy might be appropriate for your situation.

Do Exemption Laws Protect Your Assets?

Each state has exemption laws that protect certain assets from creditors. If you file for bankruptcy, exemption laws also protect your assets from the trustee.

It's essential to 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.

Can Creditors Garnish Your Income?

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, have special protections that extend to funds directly deposited into your bank account.

Find the Debt-Relief Option That's Best for You

Here are some debt-relief options to consider.

Create a Budget

Start by listing all of your outstanding debt. Then make a budget that includes all of your income and expenses. Explore ways to reduce spending and expenses—and, if possible, increase your income—then revise your budget accordingly.

Next, using your budget as a guide, come up with a realistic dollar amount that you can devote to paying your debts each month. At this point, it might also be helpful to prioritize your debts. That is, determine which are the most important to pay.

Do Nothing and Get Debt Relief That Way

Generally, doing nothing is only an option if you're judgment-proof. "Judgment proof" means that your creditors, even if they sue and get a judgment against you, won't be able to collect from you.

In most cases, all of the following must apply for you to be judgment proof:

  • your debt is all unsecured
  • your situation is likely permanent
  • all of your property is protected by exemptions, and
  • your income can't be garnished.

However, even if you think you're judgment proof, ignoring your creditors and debts is usually not a good idea. Being judgment proof could be just a temporary condition because your financial situation could improve.

Negotiate With Your Creditors to Get Debt Relief

You might be able to get some relief by negotiating with your creditors directly. Different types of debt have different options. For example:

  • 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.
  • You could be able to settle a debt by paying less than you owe.

Once you know what you can afford to pay each month, contact your creditors. Tell them what's going on—maybe you suffered a job loss, divorce, medical problems, or other financial trouble—and explain how the hardship has impacted your ability to pay your account. Inquire about options for debt relief and ask for help.

You might be able to settle some debts, like credit card debt, by paying less than you owe in a lump sum. Remember that if you settle a debt, the amount that the creditor forgives might be taxable.

If you're not happy with the alternatives, feel free to ask if any other options are available for you to consider. The more you know about your choices, the more likely you'll be able to come to an agreement that works for your circumstances.

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 might 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.

Seek Debt-Relief Assistance From a Consumer Credit Counseling Agency

Another option is to get debt-relief 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. A credit counseling agency might 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, you're adding to your debt load.

Also, before you use a credit counseling agency, do some research. Not all agencies are legitimate; some charge excessive fees, fail to perform promised services, or sign you up for a debt management plan without explaining other options, like filing for bankruptcy.

File for Bankruptcy to Get Debt Relief

If reaching individual agreements with your creditors is impractical, you have a lot of unsecured debt, or you want to stop a wage garnishment, bankruptcy might be the best solution.

  • Chapter 7 bankruptcy overview. With a Chapter 7 bankruptcy, you ask the bankruptcy court to eliminate (discharge) the debts you owe. But keep in mind that not all debts are dischargeable, and not everyone qualifies to file for Chapter 7.
  • Chapter 13 bankruptcy overview. With a Chapter 13 bankruptcy, you file a plan with the bankruptcy court that details how you will pay back your creditors. You have to repay some debts fully, but other debts might be partially repaid or not paid back at all, depending on what you can afford.

Get Help With Your Federal Student Loans

If you can't make your federal student loan payments, a variety of options are available to you. In most instances, you must take action before falling too far behind.

The options differ based on the type of loan you have. You might qualify for a better repayment plan, loan cancelation, deferral, or forbearance. Consolidation might help, but it might also limit your options.

Contact your loan servicer to learn more about the various alternatives. You can also learn about your options by going to studentaid.gov.

Get Help From Family or Friends

For most people, getting debt-relief assistance from family or friends is a short-term option. But getting help from family or friends might be easier if you have a plan for dealing with your debts.

For example, your family might be more likely to pay your bankruptcy attorneys' fees or help you out with a payment to rehabilitate your federal student loans, which then enables you to get on a better repayment plan, instead of helping you make payments every time you fall behind.

Watch Out for Debt-Relief Tricks and Scams

When you're in a difficult financial situation, you're particularly vulnerable to debt-relief scams, collection tricks, and bad options.

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Consult With a Debt-Relief Lawyer

Consider consulting with a debt-relief lawyer to get more information if you need help deciding which course of action is best.

Again, if you have a lot of debts you can't pay, you might also want to consider filing for bankruptcy. In that situation, you'll want to talk to a bankruptcy lawyer.

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