It's a situation all too familiar to millions of Americans these days. After years of hard work, a sudden job loss, pay cut, furlough or simple over-reliance on debt has left too little cash on hand to pay the monthly bills. More than 13 million people are currently in hock to collections agencies or are seriously considering bankruptcy, according to a recent report by the National Foundation for Credit Counseling.
If you find yourself falling behind on your bills, there are several steps you can take to help reduce the amount of money you owe and help preserve the assets you still have. Here's a rundown.
1. Know where you stand. It's important to face up to the problem, rather than tucking threatening letters into a desk drawer. Begin by assessing your complete financial situation. That means tallying up your total income after all taxes and other deductions. Then compare it to your monthly obligations, including housing and car payments, credit card bills and other debts. Add discretionary items, like how much you spend on entertainment and restaurants.
If your income doesn't match, or exceed, how much you're spending, it's time to make some tough choices. That's what one New Jersey couple realized it had to do.
"One party was unemployed and the other was working, but they were living on credit cards that were close to being maxed out," says Michael Kay, a financial planner in Livingston, N.J. "When all was said and done, they had to sell their home, even though it wasn't the best time to do so, to get out of debt."
2. Negotiate with creditors. If the math indicates you're going to have a hard time covering your debts, talk to your creditors before resorting to more desperate measures. If the loan is still held by your bank or original lender, it may be willing to negotiate a temporary solution.
"Your bank or a credit card company has a strong incentive to try to work things out," says Ted Beck, the head of the National Endowment for Financial Education, a nonprofit organization that focuses on personal finance.
3.Know who you're talking with. Don't assume an aggressive debt collector who calls your home has the upper hand, either. First, determine whether the caller represents your lender itself or an outside collections agency. Banks may see someone who missed a payment or two as potentially a good customer down the road and try not to alienate him or her, Beck says. "The last thing that they want to do is own your house."
Collections agencies typically work by buying the rights to your loan at a discount from the original creditor. Then they begin calling debtors to try to recoup as much of the face value of the loan as they can.
4. Only do deals you can live with. It's key to only agree to new terms that you can live with. If a bank offers to lower your payment from say, $500 to $200 a month, accept only if you're sure you can keep up. Failure to meet the reduced rates could undercut your argument that with the bank.
If the bank refuses to lower your payments, ask it to at least drop late payment penalties or the interest rate it's charging you.
5. Make sure your information is accurate. At the same time, confirm with the lender or collection agency that all the information they have about your payment history is correct and that you agree with their tally of how much you owe. If you discover a payment you mailed was never credited to your account, a bank may be willing to cut you a break. Ask for a full explanation of your loan, and where you stand in terms of paying it back, in writing.
If you're dealing with a collection agency, keep a written record of all times that it calls, who you speak with and what is said. Don't give out any information that is unrelated to the debt, Beck warns.
6. Know your rights. Debt collection agencies are also bound by a strict set of federal rules. They are not allowed to threaten or harass you, call outside of designated hours (which vary by state) or publish a list of people who haven't paid their debts. The Federal Trade Commission, a government agency, publishes a list of consumer's rights for dealing with debt collectors (found here.)
Beware of Financial Scams
7. Avoid desperate measures. Finally, don't let past debts push you into making bad financial decisions. Cash advances from credit cards, payday loans and title loans against your car are all extremely expensive.
"These loans have astronomical interest rates and a structure that makes them very hard to pay back," Beck says.
Beware of any company that promises it can consolidate your debt for an upfront fee because it may be a scam. Instead, turn to an organization like the National Foundation for Credit Counseling, which offers free advice from trained credit counselors.