It’s easy to run up credit card debt. Paying off massive amounts is the not so easy part.
When my credit card balance got down to zero, I worked real hard to keep it that way. I don’t want to go through the stress of worrying about finding the money to pay that darned bill.
How do you pay off debt when you don’t know where to start or even where you’re going to find the money for repayment?
If your current income doesn’t allow you to make payments to your debt, and you don’t foresee any changes in the immediate future, you need to figure out your options.
Debt snowball and avalanche
Financial experts suggest using either the debt snowball or the debt avalanche to start clearing up your credit cards and loans.
But what’s the difference between a snowball and an avalanche?
With the debt snowball, you organize your debts from the lowest amount due to the highest amount owing. You pay the monthly minimum due on all of them, except for the lowest amount, and try to put as much money toward that as possible until it’s paid off. Once it’s paid – whew what a victory! – you now concentrate on the second lowest amount, except you now add in the money that was used to pay down the lowest debt. You can continue along until all the debts are paid in full.
If you’re using the debt avalanche, you list your debts based on the interest due, from highest to lowest. And you still tackle it like the debt snowball. Once one debt is paid off, you use that monthly amount and add it to the next debt on the list, and keep going.
I talk more about my debt snowball experience on my post, Taking Control of Debt on a Low Income.
Consolidate your loans
If you have a good relationship with your financial institution, you may be able to get a loan to consolidate all your debt. For example, the bank loans you $10,000 and you pay off your two credit cards and you car loan in full. Now you just need to pay one monthly amount to your financial institution, and probably at a much lower interest rate.
Stop using your credit cards if you do this. The idea is not to keep running up more debt.
Use one credit card to pay off another
Sometimes you can find a credit card with a 0% interest rate and transfer your other credit card balances to this one card.
If you do this, stop using your other credit cards so you don’t run up the debt again.
Again, see the juggling act/using Peter to pay Paul post.
Secured or unsecured debt?
The type of debt you have depends on the risk the financial institution is taking on you. If you’re unable to repay the debt, and you have a secured loan like a house or a car, the financial institution can take that property away from you.
Credit cards are unsecured debt. That means if a collection agent calls and threatens to take your car or your house, they can’t do that. You didn’t put those items for collateral when you entered into a credit card agreement.
Other loans can be unsecured debt. I remember the time I took out a loan to buy a used horse trailer. It was an unsecured loan. If I couldn’t repay it, the credit union did not want my old horse trailer.
That’s the thing with most financial institutions. They don’t want your house, your car, your boat, your trailer, not even your dog or your horse.
They just want their money.
Credit counselling companies
If you can’t pay the minimum amount owing on your loans and credit cards, and are getting nowhere asking your creditor for lower payments or a deferral, a credit counsellor might be able to help. They can negotiate lower interest rates and monthly payments. If you miss a payment, that arrangement will probably be voided.
They can also negotiate debt settlement. That means they can make an agreement for you to pay your creditor a lump sum in a lower amount than the full amount due. You will need to make arrangements with a financial institution or the bank of mom and dad, or maybe even sell your car in order to have that lump sum ready to pay off. This will affect your credit rating when that creditor reports the settlement pay off.
Credit counsellors don’t work for free, so expect to pay a fee for their services.
If you live in Canada, you can receive free and confidential credit counselling services through the Credit Counselling Society. They have offices across the country. Even if you’re not in Canada, their resources may be useful.
In the states, try the NFCC, a nonprofit, free credit counselling service.
Alternately, do an Internet search with your location plus “free credit counselling”. Make sure you’re dealing with a free not fee service!
Bankruptcy should be a last resort. If you were to liquidate all your assets and still unable to pay off all your debts, and no other solutions are viable, declaring bankruptcy might be your only option. This means your debts are higher than your assets and you’re unable to repay.
You will need to hire a trustee who performs insolvency services and that will cost you money, at least $1,000. Some bankruptcy trustees may be willing to accept a monthly repayment plan.
The trustee does all the work filing the paperwork and informing your creditors of the bankruptcy.
A bankruptcy stays on your credit report for 6 to 7 years, and should be considered a second chance to get yourself financially back on track.
There are some things that can not be written off under bankruptcy, like arrears on child and spouse support, but your trustee can explain that to you.
If you’re unable to pay your bills, a collection agent will be calling.
Your first collection call might come from a person in the accounts receivable department of the company you owe money to. Generally, this is a reminder call, and also a check in to see if you’re having financial difficulties, in which case they may have a deferral policy that can relieve some stress.
However, this doesn’t always happen. Maybe you’re only a month or two overdue, and your creditor just refers your account to a collection agency.
Check out my post about choosing shipping where UPS Canada called a collection agency on me on a fully paid bill. Some companies have really screwed up accounting departments!
If you don’t cooperate with the company you owe the debt to, they’ll probably hand your account over to a collection agency to see if they have better luck. Most collection agencies charge their clients 50% of whatever money they can collect.
The United Way has tips on how to deal with collection agents.
Scumbag collection agents
A company might eventually write off a bad debt, but don’t think you’re off the hook. These bad debts get sold for pennies on the dollar to some real scumbag collection agencies who employ a bunch of thugs.
These collection agencies count on debtors not knowing the collection laws in their state or province. They’ll phone outside acceptable hours, they’ll threaten violence, and jail time. They can’t phone you at work if you tell them you can’t take personal calls there. These thugs use every scare tactic out there to extort money off people who are unable to pay.
They can’t take your car or your house. At least not without a court order signed by a judge. Did you go to court? Then, don’t worry.
Don’t believe those scumbags if they tell you they’re sending the police to your house right now to arrest you and throw you in jail if you don’t make an immediate payment. If you’re involved in fraud and scamming money from victims, that’s a whole other story. If the police put everyone in jail who can’t pay their Home Depot or Mastercard bill, they’d have to build more jails to hold everyone!
You have legal recourse if collection agents are breaking the law. This is where a credit counsellor can assist you on dealing with these thugs.
It’s also important to know about a little thing called the statute of limitations. Depending on where you live, if you haven’t paid on your debt, after two or three years the creditor can no longer take you to court. All they can do is phone you and pressure you into making payments.
Don’t hide your head in the sand
When it comes to overdue bills, avoidance often seems like the easiest solution.
If you’re struggling to pay your debts, don’t ignore the problem. It’ll only become bigger. Communicating with creditors is smarter than avoiding them.
Learn what options are available to you, and don’t get taken in by scams that promise to eliminate your debt. Stay away from credit repair clinics that can cause you more trouble.
When unpaid bills start piling up, you need to take action. Accepting assistance from non-profit credit counsellors is a good starting point if collection departments or agencies refuse to work with you.
Prioritize your debts. Shelter, food, utilities, and transportation are more important than paying your Home Depot bill.
If you can’t pay your bills, you’re not alone. Many people are in the same position as you, struggling to find answers on what to do when they can’t pay their bills.
There are ways out.
Don’t be pressurized into doing anything. Understand your legal responsibilities and any available solutions before taking any action.
You can get past this!