Step One: Prioritize Your Bills
Some bills are more easily put off than others. Some missed payments can lead to disaster quickly. The key is knowing which is which.
We begin with Psychology 101, specifically Maslow’s Hierarchy of Needs. Laid out in a pyramid, Maslow says needs lower in the hierarchy (food, shelter, rest, warmth) must be met before needs higher up (security, belonging, esteem) can be satisfied.
The same applies to your struggling budget. Look first and foremost to your essentials – meaning food, shelter, utilities — which come before anything else, including cell phone, cable and internet service. That also includes credit scores. They may be damaged as you’re working through this, but credit scores can recover.
Priority One Bills: Essentials
- Food: Whatever else, you must feed yourself and your family.
- Housing: The roof over your head. Home, sweet home. The proverbial castle. If you think you might miss a mortgage payment, contact your lender about hardship options. Eighteen states and the District of Columbia also have “hardest hit” programs to help homeowners avoid foreclosure.
- Utilities: Power (electric and, sometimes, gas) and water are fundamental to human existence.
Next comes items that, while not essential, are too important for you to ignore and hope they go away. They won’t.
Priority Two Bills
- Taxes (Income & Property): Neglecting the former could cost you wage garnishments, property seizures and, conceivably, your freedom. Neglecting the latter could cost you your home.
- Child support: Again, the government is watching. Not only will you put custody and/or visitation at risk, failure to hold up your obligation can lead to wage garnishments, bank account invasions, even jail. If you’re struggling to pay, take advantage of governmental and nonprofit programs that provide additional financial support for single parents.
- Car payment: Especially if your vehicle is essential to getting to work.
- Insurance: There are financial and, in some cases, legal risks to letting policies lapse. If you owe on homeowner’s, renter’s, auto or health policies, pay them!
- Credit cards: If possible, at least keep up the minimum payments.
- Medical bills: If you have to stiff anyone, your medical provider(s) just might be the ticket. These bills tend not to accumulate interest, and nonpayment is less detrimental to your credit score.
- Student loans: Lenders have programs to forbear, defer and sometimes even forgive payments for borrowers who can demonstrate money is tight.
Step Two: Budgeting
Now that you know where your money has to go, you need to create a budget – a plan that takes the money you expect to make in the months to come and determines how you’re going to spend it. It is vital that you do this. You won’t get your finances in order unless you have a handle on how much you make and how much you spend. Period.
Ideally, a household budget would show you’re paying all your regular monthly bills, expenses that you know are coming (Christmas, birthdays, your children’s tuition) and money you’ll set aside in savings. But, if you’re struggling to pay your bills, don’t expect your budget to look that rosy, and don’t be discouraged. This is the starting point, not the destination.
If your budget shows your expenses exceeding income, you need to look for ways to decrease the costs or increase your income, or both. Maybe you need to eat out less often. Cable and cell phone costs are easily adjustable or removable. You might consider turning your thermostat up a couple of degrees in the summer and down a little in the winter. Shop around for lower insurance rates. Is there a part-time job that can help you make ends meet? Are there items you can sell? Find ways to turn your budget ink from red (negative cash flow) to black (positive cash flow).
Step Three: Talk to Your Lenders
This may be hard to believe, especially if you’ve been getting collection calls, but contacting your lender may be a way to get some relief. This is especially true during the pandemic, as federal regulators such as the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency are encouraging lenders to work with their customers. They want lenders to allow borrowers to defer or skip some payments, extend the payment due date or waive late fees.
In contacting your lenders, deal in facts. Explain your financial situation, give them an honest assessment of how long you expect your tough times to last and how you are trying to resolve them. Whether your hardship is short-term or long-term will help determine what repayment options you can negotiate. If your lender comes up with a repayment plan, ask for it to be sent to you in writing.
If a bank or financial institution refuses to work with you, complain to the Consumer Financial Protection Bureau.
Step Four: Face Your Debts
It’s human nature to avoid dealing with a problem and hope it goes away. Of course, it won’t. It can be scary when you can’t pay off your debt, and dealing with collection agency calls is stressful. But you can’t let that paralyze you into inaction. You’ve got to attack your debt.
Step Five: Consider Your Options
If this feels overwhelming, there is a variety of debt relief options that can help you take on this problem.
- Credit counseling – Offered by InCharge Debt Solutions, credit counseling can help you assess where you are financially and point you to programs that help. Counselors can help if you can’t resolve an issue with your credit card company, help you create a repayment plan and work with creditors to help you get financial relief.
- Debt management program – These programs create a fixed payment schedule that consolidates credit card payments into a single monthly payment on a budget that you can afford. In a debt management program, consumers generally pay lower interest rates on their credit card debt. Such plans require you to close your accounts to avoid creating more debt. These plans are offered by nonprofit credit counseling agencies, like InCharge, and do not use credit scores for eligibility.
- Debt consolidation loans – It enables you to combine multiple debts into a single loan with one monthly payment. The simplicity makes your life easier, and if your credit score is good, your high-interest debts can be rolled into a debt consolidation loan with a lower interest. That means you can pay off your debts more quickly.
- Debt settlement – Settling your debt is a high-risk option for debt relief, but one that should be examined. Debt settlement means paying less than you owe on a debt. You need to have cash available to make a lump-sum payment of at least 50% of the debt to pull this off. Not all lenders will agree to debt settlement and it does leave a stain on you credit report for seven years.
- Bankruptcy – It’s an opportunity to get out of debt and make a fresh start. For the vast majority of people, there are two kinds of bankruptcy available. In Chapter 7 bankruptcy, you ask the bankruptcy court to wipe out the debts you owe, and you surrender your assets. Not all debts can be discharged and not everyone qualifies. In Chapter 13 bankruptcy, you file a plan to repay your creditors – some in full, some partially or not at all – depending on what you can afford.
Your Next Steps
If you can’t pay your bills, don’t feel alone; a lot of people are in the same situation. There are ways out – some you can probably do yourself, others that bring in outside expertise. You can get past this. If you have additional debt or budgeting questions, contact an InCharge Debt Solutions credit counselor.