This is the second installment of a three-part weekly series featuring Next Steps When You’re In Credit Trouble. This week we tackle the question: What should you do if you are several months behind on your bills?
While everyone faces financial difficulties from time to time, getting behind on your bills is never a good idea. There are critical steps you can take to minimize the damage if you miss a payment one month, including making the minimum payment if that’s all you can afford. If you are just one month behind on your bills, check out last week’s article: what should you do if you can’t pay your credit card bills this month.
But once you are several months behind on your bills, more drastic action must be taken to satisfy a collection agency.
1. Take stock of your income
Before you can decide what to pay out, you need to know exactly what’s coming in. Gather your pay stubs and inventory your income, including the days you get paid each month and any other regular income sources you can rely upon.
2. Prioritize your bills
Your rent or mortgage payment are at the top of your debt priorities. That includes second mortgages, home equity loans, and home equity lines of credit since there are all attached to your home. If you default – fall behind – on your mortgage payment, the bank will foreclose on your home and auction it off to the highest bidder. If the bank sells your house for less than you owed on it, the bank can still come after you for the difference.
That’s not the only reason you should focus on your mortgage payment. If you default on your mortgage, your credit score will drop and you could have trouble renting a home.
Property taxes. If you fail to pay your property taxes, you can have a tax lien placed on your home. The bad thing about a tax lien is that you still owe your mortgage even if the taxing authority takes possession of your property. Not only will you owe back taxes, you’ll also owe the mortgage.
Homeowner’s insurance isn’t necessarily a debt, but it’s important that you continue to pay it because the insurance company will cancel your policy if you fall behind on your payments. If that happens, your lender will purchase insurance for you and simply add the premium to your mortgage payment.
Utilities are key because you can’t run your home without them. Why fight to pay your mortgage or rent only to have your water shut off?
3. Secured Debts Before Unsecured Debts
An auto loan payment is almost just as important as a mortgage payment for the same reason. Your auto loan is tied to your car, an asset you use to get to and from work. If you fall behind on your auto loan payments, your lender could repossess your car, auction it off, then send you a bill for the difference. Other secured debts include home equity loans and any other debts that have collateral attached to them and enthusiastic collection agencies waiting to pounce.
Federal income taxes are important, especially if you have assets the IRS (Internal Revenue Service) can take. The IRS can place a lien on your assets and even take possession of them if you don’t pay your taxes. Assets the IRS can take include your house, car, boat, RV, bank account, rental income, and interest payments. They can also garnish your wages and in some states, this is grounds for termination.
State income taxes should also be high on your priority list of debts to pay. Like the IRS, your state revenue department can sue you, garnish your wages, and place a lien on your assets.
Federal Student Loans If you fall behind on your federal student loan payments – like a Direct or Stafford loan – the IRS can take your tax refunds to cover the payments. Your wages might be garnished and you could lose your ability to get other federal loans including student loans and housing loans.
Medical Bills Pay your medical bills, especially if you need to continue to use that doctor or facility. Unpaid medical bills don’t slip through the cracks. Your hospital may spend some time trying to get you to pay the debt. After that, they may send your account to a collection agency or even sue you for the unpaid debt. The lawsuit could result in a wage garnishment or lien on your assets. You may not be able to use that physician again until you’ve repaid your bill.
Prioritize your credit card debt and other unsecured debt in order from highest interest rate to lowest interest rate. If you fail to pay your credit card debt, the credit card company will first try to get you to pay the debt. Then, it will contact a collection agency. Finally, the card issuer may sue you and ask the court for permission to take one of your assets or garnish your wages.
Notice in the list of all the people you could owe, the credit card companies come at the end of the list. Though you don’t necessarily want to face one in court, you have a lot more to lose when you fall behind on other debts.
4. Stick with the essentials
Go over your list of expenses and cancel anything that isn’t key to your survival. Cable/satellite, streaming services, newspaper subscriptions, extra phone features, paid memberships —they all need to go until you have your finances back on track and can keep collection agencies at bay.
5. Renegotiate Student Loans and Medical Bills
If you’re currently paying on student loans or medical bills, free up some money by negotiating new repayment terms. Federal student loans can be placed in forbearance or deferment, if you’re in a tight spot, which will allow you to reduce your payments or to temporarily stop making payments altogether. Medical bills are even easier to renegotiate. Just call the accounting office, explain what you can afford to pay, and they’ll usually work with you. One less collection agency to worry about.
6. Talk to Your Creditors
It’s time to get in touch with your creditors. It won’t be a fun call, but since they already know you’re in trouble, you can forgo the excuses and focus on finding a solution. Many creditors are willing to offer deferred payments, reduced payments, a late fee waiver or an extended due date, if you haven’t had a problem in the past —and that can go a long way toward satisfying collection agencies and getting your finances back on track.
Remember it is important that you cover your basic needs before you pay your creditors. This means that you have enough food to eat, a roof over your head, and your utilities are on, then you pay your bills, and then you have fun. This order of priorities is essential if you are going to survive the next few months and come out ahead. Remembering your priorities throughout the month will prevent you from running short on cash towards the end of the month. Your budget and your priorities will help you manage your cash flow more effectively.
7. Get Professional Help
If collection agencies are pounding down your door, a credit counseling agency can help. A credit counselor will work with you to figure out how to restructure your budget or negotiate lower monthly payments with your creditor. Your credit card statement will contain a number that you can call if you’re experiencing financial trouble. Or, you can reach out to the National Foundation for Credit Counseling to find a credit counseling agency in your area.
The credit counseling agency should provide you with free information about the company and their services, even without obtaining information about your financial situation. If an agency presses you for information about your debt when you’ve only requested information, the agency is probably more concerned about your business than your credit. Find another service that will work for you.
8. Stick to the plan
Once a credit counseling agency helps you come up with a plan, it’s vital to stick to the plan and see it through. The good news is you can start sleeping better at night with a plan in place. And while emerging from debt is tedious and can take months or years to achieve, it’s all worth it in the end. Really.
Next week we conclude our 3-part series with: What you should do if you are initially contacted by a bill collector.