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

Having trouble paying your bills? Here's what you need to know when you're in financial trouble.

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 keep in mind.

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 Hardest Hit Fund programs, might offer relief to homeowners who are struggling to keep up with mortgage payments and facing foreclosure. Also, almost all lenders and servicers offer loss mitigation (foreclosure avoidance) options, like loan modifications forbearance agreements, and repayment plans, to borrowers who are having trouble keeping up with payments.

Medical Debt

When it comes to medical debts, some individual medical providers are eager to work with patients that cannot pay. (For ideas on handling medical debt, see Seeking Financial Assistance For Your Medical Bills.)

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 dig yourself out of debt trouble. The path can be slow and arduous but, with hard work and diligence, you can be successful. 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 expensesand if possible, increase your incomethen 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 that are 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 that paying unsecured debts. For example, if you don't want to lose your home to foreclosure, then getting current on your mortgage should be a priority. Not paying your department store charge card bill for a while, however, might be smart if it means you can make the payment 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, it almost always makes sense to contact your creditors and let them know your situation. Some creditors may be quite willing to work with you. They might 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 are 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 what you really need is money management education or budget counseling, consider getting help from a credit counseling organization. These agencies can also suggest options for digging out of debt, provide housing counseling, and refer you to other agencies that provide specialized help. Some credit counseling agencies can contact your creditors to set up payment plans, or create a debt management plan.

If you do want help from a credit counseling agency, check out the company's credentials first. 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 of these 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 you will 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 some or all of your debt back, 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).

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