Options If You Can't Pay Your Debts

To choose the best options when you can’t pay your debts, you must first assess your financial situation. Start by doing the following:

• figure out what types of debts you have
• determine if your financial difficulty is short or long term
• determine whether your property is protected by exemptions, and
• learn about your state's wage garnishment limits.

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.

What Kind of Debt Do You Owe?

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. 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. (To learn more, read What Is Secured Debt?)

Unsecured debt. 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. (To learn more, read What Is Unsecured Debt?)

Government debt. 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.

Is Your Situation Temporary or Long-Term?

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 will need a more permanent solution which will reduce or eliminate your debts entirely.

Are Your Assets Protected by Exemption Laws?

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 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 bankruptcy exemptions, see Bankruptcy Exemptions: An Overview.)

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. (To find out whether your income is at risk or to what extent, see Nolo’s Wage Garnishments and Attachments area.)

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.)

Find the Option That Is Best for You

Here are some options to consider.

Do nothing. Generally this 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:

• 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. (To find out more, see What Does Judgment Proof Mean?)

Debt consolidation loans. If your situation is caused by high credit card payments, you might 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 might be able to get some relief by negotiating with your creditors directly. Different types of debt have different options. You might be able to reduce or temporarily suspend mortgage payments with a forbearance or loan modification, 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 might 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 or servicer and read Student Loan Repayment Plans to learn more.

Get help from family or friends. For most people, this is a short term option. However, it might 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.

Watch Out for Tricks or Scams

When you're in a difficult financial situation, you're particularly vulnerable to debt relief scams or collection tricks. To find out more about what to avoid, see Why You Should Avoid Debt Settlement Companies and What to Avoid When You Need Money.

Consult With a Lawyer

If you need help deciding which course of action is best for you, consider consulting with a debt relief lawyer to get more information.