What to Do When You Can't Pay the Bills
What do you do when your paycheck doesn’t cover your monthly bills? This has become a larger problem for people during the pandemic, but it can be a problem at any time. You may just hit a bad month, where expenses got out of control; or you may have lost a job, found yourself caring for a sick family member, or maybe your expenses increased but your paycheck didn’t. Either way, if you’re in a situation where you’re missing bill payments or skipping meals so you can meet other financial responsibilities, it’s time to take action.
THINKING OF WAITING A LITTLE LONGER?
It’s generally not easy or fun to deal with your debt. It can feel embarrassing and it does take some effort, but missing payments on your monthly bills can create issues that negatively affect your finances for a long time to come. For example:
- Unpaid debt can lower your credit score, which is particularly significant if you are hoping to purchase a house, a car, or anything that will require a loan.
- If you default on a loan that is secured (by a car, a boat, a house, or some other collateral), you may have to surrender the collateral through repossession or foreclosure.
- Employers often look at the credit scores of potential employees. It helps them determine whether the new hire is a responsible person, which helps them assess how much risk they’re taking by hiring the person.
- Rental property managers may also run a potential renter’s credit to determine whether the person is likely to pay their rent.
- Some credit unions and banks may not allow you to open an account if you have a bad history of debt repayment.
HOW CAN YOU ELIMINATE DEBT WHEN YOU CAN'T MAKE PAYMENTS?
If you don’t have the money to make monthly payments and don’t have the luxury of a wealthy benefactor or the luck to win Megabucks, you have options. You can make more money, which is often not possible, or you can ask your creditors to reduce or defer your debt. Most creditors are more than willing to offer one of these options because just the fact that you are asking for help means that you are willing to take responsibility for your debt and will likely pay it off.
Two of the most popular ways of going about this work are debt resolution and debt settlement. They sound the same but are slightly different. With debt resolution, you work individually with your financial institution and other creditors, developing a plan to reduce or defer payments to a point where you can afford to pay them. With debt settlement, you work with a debt settlement company that negotiates your debt for you. Settlement may sound easier but can cost you more in fees so I suggest debt resolution, which will feel easier once you get started. Debt settlement often leaves a mark on your credit and your report may indicate that the creditor “settled for less.” Some financial institutions may not provide services to you if a loss was incurred.
WHAT DO YOU NEED TO DO TO GET STARTED?
Begin by figuring out how much you owe. You can do this by downloading a free copy of your credit report. You may have free access to your report via your credit card, financial institution, or some other app or entity, but if not, you can request a free copy from one of the three credit bureaus. Your credit report will show all the debt that is likely to affect your credit.
Then determine which bills you need to pay versus those you want to pay. Needs could include your mortgage, car loan, insurance(s), utilities, groceries, etc. Wants could include Netflix/Hulu/etc., a magazine subscription, or some other nonessential monthly payment.
Next, determine which bills you can get relief on. As noted above, most businesses will offer relief to their customers because getting something through a repayment plan is better than getting nothing because you default on your payments.
Tackle the big debt first. Your financial institution is often the best place to start, when it comes to debt reduction. The debt you carry with your credit union or bank is likely debt that will hit your credit score if you can’t make the payments. In other words, your car loan, mortgage, or other large debts can have the greatest impact. Once you’ve got your large bills under control, you can see if your utility providers and other creditors are willing to help as well. Common ways they can help you include:
- Loan modification: This is often offered if you have experienced a “life changing” event, which will have a long-term impact on your financial situation. They may modify the terms of your debt, lengthening the payment terms so that you’re paying less each month. Lengthening the terms will result in a higher overall cost (because you will be paying more interest to keep the loan longer), but it will improve your cash flow, which justifies the extra cost if you’re able to make timely payments.
- Loan deferment: For a shorter-term situation, you may be able to get a deferment or pay interest only for a period of time while you work towards getting back into a better financial position.
- Debt consolidation: Consolidation is another option, particularly if you are dealing with debt from multiple credit cards or other unsecured debt. You may be able to consolidate credit card debt onto one card (choosing a low-interest credit card can help you further reduce costs) or if you have collateral (like a car or house) that could be used to secure a lower-interest-rate loan to consolidate other unsecured debt. For example, you may be able to use the equity in your home or vehicle to refinance and roll in other debt. This can help reduce your monthly payments so you can more easily cover other monthly financial obligations.
- Payment plan: If a modification is not available, the next step would be a payment plan. Most companies will offer a payment plan to get you back on track within a certain amount of time. Once you have your payment plans set up, watch this video for tips on how to pay debt off more quickly.
Many financial institutions will ask you for information about all your expenses to that the modifications or payment plans they suggest will leave you with enough to pay your other bills and necessary expenses. That’s another reason to start your journey with your credit union or bank. They will likely use your debt-to-income ratio to create a reasonable plan for you.
Another benefit is that loan modifications won’t negatively affect your credit. They will help bring you current on your payments and therefore can only help maintain or even build your credit.
Improve your financial skills. The more you understand your finances, the better off you’ll be. Reading is a great way to learn but sometimes you need a helping hand – someone who can offer expert advice that will get you on the right path. This is where financial counselors come in. There are a range of options out there to help you with budgeting, setting up payment plans, and reducing your debt for good.
ARE YOU STRUGGLING TO IMPROVE YOUR CREDIT SCORE?
GreenPath Offers Free Financial Counseling to Help You Break Free of Debt.
WHAT ELSE CAN YOU DO TO MAKE YOUR PAYMENTS?
Budgeting your expenses is key to staying on track with your finances. To create a budget, you need to take into account all income and expenses for each month. When you’re struggling, your expenses should include only the things you need. If your income covers those expenses, don’t spend it on something you want until you’ve gotten your debt under control. Instead, put it toward your highest-interest debt. That way, you’ll pay your debt faster and save yourself some money by avoiding unnecessary interest payments. Read this article for more ideas to help you live within a tighter budget.
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The views and opinions expressed in this blog are those of the authors and do not necessarily reflect those of VSECU.