What to do when you cannot make your payments

When your income suddenly decreases or disappears completely, the question quickly becomes what do you do about all those bills you're supposed to be paying? If you find yourself in such a situation, the best first step is always is to communicate with each of your creditors explaining your situation. 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.

Utility Companies
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.

Housing lenders
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, considering speaking with 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 may 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. 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.

Insurance issuers
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.

This is an updated version of an article that was originally published in March 2011.

Jesse Campbell is the Content Manager at MMI, focused on creating and delivering valuable educational materials that help families through everyday and extraordinary financial challenges.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.