If a decrease in income makes it difficult or impossible to maintain debt payments, the best course of action is to communicate with each of your creditors explaining your situation and how you plan to repay your debt. Tell them that you are unable, not unwilling, to repay as agreed. Remember, it is always best to contact your creditors before they have to contact you.
The best way to contact your creditors is in writing; after you have written your letters:
- Maintain accurate files. Before mailing your letters, make copies to keep for your files. If you must negotiate over the phone, keep detailed notes including the representative’s name, title and phone number. Follow-up any phone conversations in writing.
- Stay organized. Write a summary list of your financial plan for quick reference. Revisit the plan regularly to make sure you are on-track.
- Be prepared for calls. After sending your letters, you can expect some of your creditors to call with additional questions. If they do, be honest and courteous.
- Keep your end of the bargain. If you are unable to make agreed upon payments, contact your creditors immediately to renegotiate.
Following is more information on dealing with specific types of creditors. Of course, the outcome can vary from creditor to creditor.
Each utility company has its own procedure to follow before disconnecting service. The procedure generally includes notification in person, by mail or by phone. Before shutting off service, the company may offer a budget plan to help you repay any past due amount. Remember, utility companies do not want to discontinue your service. They might even have information about available emergency funds to help you pay past bills.
Be sure to ask for help at the first sign of financial trouble. Once your utilities are disconnected, you may have to pay the past due bill in full or pay a substantial deposit to reinitiate service. You might also have to reapply for the utility and pay installation charges.
If you do not make your mortgage payments, you home could be foreclosed. Fortunately, there are many alternatives to foreclosure. For example, if you have the amount of money required bring your loan current, the mortgage company will reinstate your mortgage. You may also contact your mortgage company and work out a repayment plan.
For help, call a HUD-certified housing counselor. If your home loan is backed by the Department of Veteran’s Affairs, call your local VA center. You can also check with your local United Way for assistance.
If you are a renter, contact your landlord about your situation immediately. The landlord may accept partial payment for one or two months. You may want to look for less expensive housing, but be realistic and remember to include moving expenses, deposits and family adjustments as you calculate costs. If it is a private landlord and you or family members are able, you may be able to do some maintenance work in place of part of your rental costs.
Car and other vehicle lenders
If you cannot make your car or other vehicle payments, they can be repossessed. Repossession means that the creditor takes the vehicle and it is sold at a public or private auction. If the vehicle is sold for less than the amount still owed on it, as is often the case, you are liable for the remainder that is owed on the vehicle.
Check with the creditor to see if the loan can be rewritten for lower monthly payments. Ask for an extension, with the extension fee attached to the end of the loan. If you do not need the vehicle, if it is a second car or a recreational vehicle, ask the creditor if you could sell the vehicle and pay the creditor off with what you receive. Also, find out about the procedure if you sold the vehicle to someone who would take over payments.
Credit card issuers
Late fees and over-the-limit charges can quickly add up to a debt problem. Many creditors are also raising rates and even closing accounts as penalties for late payments. In addition, nonpayment could lead to your accounts being canceled and the debt may be turned over to a collection agency.
Notifying your creditors of your changed financial situation may not stop all collection activity; however, many creditors are likely to assist by waiving interest, granting extensions or reducing payments. Do not be tempted to replace income with credit card cash advances. Available credit should be used extremely cautiously.
Do not allow insurance to lapse. Write your insurers immediately and explain your situation. Ask what payment options are available. Check with your insurance company; there may be a grace period in making payments from 10 to 30 days. Determine your minimum needs for insurance. Cancel duplicate and non-essential policies. For basic essential policies consider these options:
- Car Insurance. By law, you may need to retain your liability coverage. You can research the possibility of reducing your premium costs by increasing the deductible on your collision and comprehensive coverage.
- Health Insurance. Check to see if the health insurance provided by your former employer is continued. If coverage is not available or if you can’t afford the premium, find out if you qualify for Medicaid. Also, check into policies that would pay for major hospitalization and find out what community services are available for routine medical concerns.
- Life Insurance. Consider changing your policy to a less expensive form. Check into the possibility of borrowing money on your policy to pay premiums.
For more information on surviving an income loss read When the income decreases, it pays to set priorities.