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

Many Americans are in debt trouble. 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 seven things to remember.

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 strategies.

Mortgage Debt

State programs, like Homeowner Assistance Fund programs, might offer relief to homeowners struggling to keep up with mortgage payments and facing foreclosure. Also, almost all lenders and servicers provide loss mitigation (foreclosure avoidance) options, like loan modifications, forbearance agreements, and repayment plans, to borrowers having trouble paying.

Medical Debt

Regarding medical debts, some individual medical providers are eager to work with patients that can't pay.

Student Loan Debt

And if you have student loans, it pays to learn about government programs that may provide relief, like cancellation options.

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 might be able to get yourself out of debt trouble. The path can be slow and arduous, but you can be successful with hard work and diligence. Here are some options to consider.

Start by making a budget that includes all of your income and expenses. Explore ways to reduce spending and costs 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 essential to pay—like the mortgage, utility bills, and child support—and those that might be less important, like department store charge cards or loans from family and friends.

3. Secured Loans Deserve Extra Attention

Generally speaking, paying secured debts is more important than paying unsecured debts. For example, if you don't want to lose your home to foreclosure, getting current on your mortgage should be a priority.

However, not paying your department store charge card bill for a while might be wise if you can pay 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, contacting your creditors and letting them know your situation almost always makes sense. Some creditors might be quite willing to work with you. They could 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're considered 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's often no point in communicating with them.

5. Credit Counseling Can Help—But Be Careful

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

Before you get help from a credit counseling agency, check out the company's credentials. Not all agencies are legitimate. Some charge excessive fees, fail to perform promised services or provide bad advice. The National Foundation for Credit Counseling website is a good place to start looking for a legitimate credit counseling agency.

6. Credit Repair Clinics Aren't Worth the Money

If you want to clean up your credit file, steer clear of credit repair clinics. These companies claim they can fix your credit, qualify you for a loan, or get you a credit card. But you shouldn't have to pay for these services: These companies do the same things you can easily do yourself.

And some companies use illegal tactics that can land you in hot water.

7. Bankruptcy Might Be a Good Option

Bankruptcy is an affordable and surprisingly easy federal court remedy that frequently allows debtors to get rid of their debt and start over without paying anything back. Bankruptcies can generally be described as "liquidation" (Chapter 7) or "reorganization" (Chapter 13).

Under a Chapter 7 bankruptcy, you ask the bankruptcy court to wipe out (discharge) the debts you owe. But keep in mind that not all debts are dischargeable, and not everyone qualifies to file for Chapter 7.

Under a Chapter 13 bankruptcy, you file a plan with the bankruptcy court detailing how to repay your creditors. You must repay some debts in full; other debts may be repaid only partially or not at all, depending on what you can afford. If you are inclined to pay back some or all of your debt, Chapter 13 bankruptcy may be a better approach to managing debt than a debt management plan.

Getting More Information

For a comprehensive guide on dealing with financial problems, including how to prioritize debts, budget your money, negotiate with creditors, avoid foreclosure, and more, get Solve Your Money Troubles: Strategies to Get Out of Debt and Stay That Way, by Amy Loftsgordon and Cara O'Neill (Nolo).