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Blogging for Change Blogging For Change
by Jesse Campbell on April 15, 2015

What happens if I pay less than the minimum payment? 

Is paying less than $50 a month to a creditor acceptable if that is all you can afford to pay, no matter the amount owed? Can they reject payment even though you are trying? –Diane

(Please note - The following is presented for informational purposes only and shouldn't be construed as legal advice. I am very much not a lawyer. I don't even play one on TV.)

Hi Diane –

I’m not sure where it started, but there’s a fairly common misconception out there that if you send a creditor a payment below the minimum and they take that payment, they have “accepted” the payment, and now everything is square. A lot of people (seriously a lot – so don’t feel bad if you’ve been operating under this misunderstanding) think that every time a creditor accepts a payment, they’re making a legal agreement, one that says, “We cashed this check, so your required payment has been satisfied.”

Creditors will almost always take whatever amount you send them – you owe them money, they want that money, so they’re not going to say no. But when you sign an agreement for a loan or a credit card, you agree to make a certain minimum payment each month. If you don’t make that minimum payment, unfortunately, you’ve breached the contract.

In other words, payments below the minimum will almost always be accepted, but your account will still be delinquent. Your account will fall behind however much your payment was short (if your minimum was $50 and you paid $30, your account would be $20 past due). From a credit reporting perspective, the account would then be 30 days delinquent, and it would remain delinquent until you’ve made the payments required to get caught up.

If you don't meet your minimum payment

If you can’t meet your minimum payment, your first step should be to contact your creditor. Let them know what the situation is and see if they can help. Many lenders offer short-term hardship programs that could potentially reduce your minimum payment for a fixed number of months. You should keep in mind, however, that these programs are only designed to keep your accounts from going delinquent. You won’t make much progress paying down your debt while you’re on a hardship program.

If your creditor can’t help you, or if you have multiple accounts where you’re struggling to meet the minimum payment, you may benefit from credit counseling and a Debt Management Plan. Continued failure to meet your minimum payments can be indicative of budgeting issues, bad spending habits, or simply carrying too much debt to properly manage. A certified credit counselor can help you better understand why you’re struggling and offer a variety of potential solutions to help you stabilize your finances.

Whatever you do, don’t just keep making short payments. Unless you’ve come to a new agreement with your creditor, making consistently less-than-minimum payments will eventually end with you defaulting on the account, which will more than likely put the account into collections. The sooner you address the problem, the better.

Good luck!

Comment(s)

Charmane J says:
April 21, 2015

Can you request to close an account while you are on DMP? What are the steps to better do this?



Jesse says:
April 21, 2015
Website: MoneyManagement.org

Hi Sonia - If you were on a DMP and saved money in reduced interest charges, the IRS would NOT attempt to collect money based on what you saved. When a creditor accepts a proposal to have an account included on a DMP, they agree to reduce your interest rate going forward. Your debt is not being forgiven or reduced - you are simply being charged less interest going forward.What you may be thinking of is what happens when you settle on a delinquent debt. If you owe $10,000, for example, and the company that owns the debt agrees to settle the debt for $6,000, the $4,000 difference is considered taxable income. You would be required to claim the $4,000 as income on your tax returns.A Debt Management Plan never involves any kind of settlement. Accounts are always paid in full, so you don't need to worry about the money saved causing an additional tax burden. I hope that answered your question!



Leah says:
November 03, 2016

Is the same true for federal student loans, I am being told with 'authority' that student loans are different and they cannot be put in collections if you make a 5$ a month payment on each loan. How can this be true?



Sonia reyes says:
April 16, 2015

I've been told that IRS will collect the interest I saved when I was in the program, is it true??



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