Credit: Shutterstock photoWhen Bruce McClary was a housing counselor, his clients regularly showed up for appointments with grocery bags full of unopened bills.
“It wasn’t unusual. They couldn’t pay the bills, so they didn’t open them,” says McClary, who now works in public relations for the National Foundation for Credit Counseling.
Ignoring bills seems to work — at least for a while. The repo man typically won’t take your car if you’re a little late with your payment (although he can). Credit card companies and student lenders may start to call, but you can always send them to voicemail. Foreclosures can take months, if not years, depending on where you live.
Behind the scenes, though, your creditors are marshaling their forces against you. Your credit is getting trashed and you’re putting yourself at risk of lawsuits and wage garnishment. You could lose the car you need to get to work and the roof over your head. And those collectors could easily pressure you into paying the wrong bills first, making matters worse.
When the money you’ve got just won’t go far enough, you need to know how to strategically pay some bills — and minimize the fallout from not paying them all. Here’s how to put a plan together.
Protect the essentials
These include shelter, food, heat, lights, transportation and whatever else you need to be able to work (such as child care and phone service). What’s not essential? For now, everything else.
If you can’t cover even these basics, it’s time for some triage. You may need to move if you can’t afford where you’re living, for example. You want to avoid an eviction, which would make getting another place really hard if not impossible.
There’s an exception to this rule, however. If you can’t afford your mortgage payment, you may want to stay put. The foreclosure process typically takes several months, which means you could stay in your current home for free while you try to fix the rest of your financial life.
Utilities may offer discounts or subsidies to low-income customers. Food banks are available to anyone, and you may qualify for Supplemental Nutritional Assistance Program, formerly known as food stamps. Visit Benefits.gov to explore your options.
Understand the consequences of failing to pay
The potential fallout varies dramatically by the type of debt and how long it goes unpaid. Knowing the differences can help you decide which debts to prioritize.
Virtually any skipped payment will hurt you somehow. Missing a single payment on a credit account can chip more than 100 points off good credit scores, and the damage worsens the longer a debt goes unpaid.
Credit scores can recover, though, so if you can’t pay your bills you should focus on the other potential consequences.
The toll for failing to pay federal student loans, tax debt and child support can be particularly severe, since the government has special powers to collect debt. You can lose your tax refunds, have your wages garnished without a court hearing and, in the case of unpaid child support, even wind up in jail. These debts also typically can’t be erased in bankruptcy.
Creditors can sue you over unpaid credit cards, medical bills and other unsecured debt. If you are sued, it’s important to show up in court — otherwise a default judgment will be entered against you that can lead to wage garnishment and raids on your bank account. Many states allow you to be arrested for failing to respond to a court order to appear about a debt.
If you do appear, you may be able to argue that the creditor shouldn’t have sued you in the first place. Sometimes the law firms that file these suits do so even though the debt is technically too old; each state has statutes of limitation to restrict how long creditors have to sue you over debts. The law firm may not have adequate documentation to prove you owe the debt or may have made a mistake in trying to serve you notice of the lawsuit.
Get some breathing room
The debts with the worst consequences typically have at least some options for people who are temporarily unable to pay:
- If you have federal student loans, explore income-driven repayment plans that can lower your payments, or look into getting a deferral or forbearance. Read “Income-based repayment: How it works and who it’s best for.”
- Private student loans have fewer repayment options and shorter deferral periods than federal loans, but you may still be able to get some relief if you ask. Keep in mind, though, that private student lenders don’t have the same powers to seize tax refunds and garnish your wages without a court appearance; plus, private student loans are subject to state statutes of limitation. These loans can’t be erased in bankruptcy, but lenders have a limited time to compel you to pay. Read “3 ways to tackle private student loans.”
- The IRS and other tax authorities offer installment plans to pay off your tax debt over time. If your situation is really bad — you have no assets to seize and little chance of earning enough money to pay what you owe — the IRS may consider an “offer in compromise” to settle your tax debt. Read “How to resolve your tax debt.”
- You may be able to lower your child support, or at least avoid arrest, by asking a court to modify the order.
- Federal programs may help you modify your mortgage so you can afford the payments.
- Your credit card issuers may have hardship programs. Read “What should you do if you can’t make your credit card payments?”
- Your medical providers may offer financial assistance or charitable relief that can reduce your bill. Read “A guide to medical bill assistance.”
Don’t throw good money after bad
Ideally, you would have a plan to deal with all of your unsecured consumer debts — credit cards, medical bills, personal loans, collections accounts — before you make a payment on any of them.
That may mean a visit to a credit counselor or a bankruptcy attorney. It’s better to do it sooner rather than later. Read “4 ways to find debt relief.”
While tossing a few bucks to your credit card issuers or collection agencies may temporarily get them off your back, such payments are ultimately pointless if you wind up erasing your debts in bankruptcy or entering a debt management plan. When you send money to a collection agency, you also risk reviving the statute of limitations that otherwise caps how long a creditor has to sue.
If your finances recover to the point where you can start to pay your bills, read “How to pay off debt” and “Should I consolidate my debt?”
And if you’d like to cut the odds of being overwhelmed by debt again, having an emergency fund is all the more important.
Liz Weston is a columnist at NerdWallet, a personal finance website, and author of “Your Credit Score.” Email: lweston@nerdwallet.com. Twitter: @lizweston.
This article originally appeared on NerdWallet.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
