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Set Your Priorities
In a financial crunch, some bills must be paid immediately, while others may wait. For some bills, smaller payments may satisfy the creditor until you get back on your feet. (I am assuming here that you want to try to pay all your bills and don’t want to sell the house or the car or any other asset that is secured by a loan.) Here are some guidelines for juggling your bills:
Bankcards: Major credit cards are valuable references on your credit report. If you are worried about keeping your credit rating intact, try to make sure they are paid on time. For the short term, don’t worry about making more than the minimum monthly payment. That’s all you need to pay to keep your credit record clean.
If you can’t make at least your minimum payments, watch out for stiff late fees. Some issuers will raise interest rates if you are late with one or more payments, and may also raise your interest rate substantially if you are late with a payment. I’ve even encountered issuers who will raise your interest rate if you are late on other bills listed on your credit report.
Department-Store Cards that appear on your credit record: Since balances on department-store cards are often fairly low, you can probably fit the minimum payments for these into your budget. If not, most department-store card issuers will be willing to accept lower payments for a few months.
Mortgage: Your mortgage may or may not appear on your credit report each month, but payment information will in most cases be reported to the bureaus if you become ninety days or more late on your payments. In addition, mortgages tend to carry hefty fees for late payments, and if you miss two or more payments your lender may initiate foreclosure proceedings. Your mortgage is an important bill—try to pay it first.
Child Support: Paying child support is not only the “right” thing to do; it’s important as far as maintaining your credit history is concerned. By law, credit bureaus must report any information received about overdue child support, as long as it is verified by the proper agency and is not more than seven years old. Child-support payments that are late by any amount may be reported by a state child-support enforcement agency if it so chooses. A number of states are doing so.
Also, if you don’t pay your child support, you may find yourself the target of one of the increasing number of programs designed to crack down on what are usually called “deadbeat dads” (although there are a few deadbeat moms, too). If you don’t pay your child support, you could find your tax refund intercepted, your wages garnisheed, a lien placed on your property, your driver’s license suspended, or your picture may even be advertised on a “Most Wanted” list!
If you really can’t pay your child support because of a change in your financial circumstances, you’ll have to go to court to see if you can get your future payments reduced.
Utilities: Obviously, you do not want your electricity or phone service cut off. Utility companies, however, may be willing to work out a modified payment schedule for a short period of time. Utilities generally don’t show up on credit reports, so you probably don’t have to worry about damaging your credit record if you can’t pay on time. If you do pay late, you may find that in the future you will be required to put up larger security deposits for services.
Taxes: Falling behind on your taxes may create numerous problems, including penalties, interest, or damage to your credit report if the IRS files a tax lien against your property. The IRS can be tough on delinquent taxpayers. Unlike creditors or debt collectors, it doesn’t have to take you to court before it garnishees your wages or seizes your bank accounts to pay past-due taxes.
If you do not have the money to pay your taxes, don’t put off filing your returns. There are separate penalties for filing late and for paying late. By filing you may at least be able to avoid the former. If you can’t pay what you owe, you may want to consider charging the balances to a credit card, borrowing the money from friends or family, or requesting a repayment plan with the IRS. To request a repayment plan, fill out the appropriate form (see http://www.irs.gov) or suggest your own payment plan with your return. If it’s reasonable, you probably won’t have much trouble getting it approved. Just make sure you can stick with the plan you propose!
Medical Bills: Most medical bills are not reported to credit bureaus until they are sent to collections. You can very likely work out a modified payment schedule with the doctor or hospital. Just be sure to confirm any agreements in writing and ask for confirmation that smaller payments will not harm your credit rating.
Also be sure to check your medical bills carefully to make sure you weren’t overcharged for anything. It happens all the time. There’s no reason to pay for services you didn’t receive.
There are companies that specialize in reviewing medical bills to see if you have been overcharged. Their fee is often a percentage of the amount they recover for you. If you have been involved in a lengthy or chronic illness, working with one of these companies may be a helpful resource.
Gasoline Cards: Most gasoline accounts are not reported to credit card companies until you are behind ninety days or more. Avoid pulling out your gasoline cards to charge gas during a credit crisis, however, since you may spend more than you would if you were paying cash.
Student Loans: Delinquent student loans can be one of the biggest credit nightmares you’ll ever encounter. Dramatic increases in the cost of higher education coupled with federal loan guarantees that make it easy for students to borrow large amounts of money they may never be able to pay back meant that many adults today are struggling to make student loan payments for decades—if not longer.
Because of massive defaults on student loans in the 1980s, Congress cracked down. Student loans now are very difficult (if not impossible) to discharge in bankruptcy. There is no statute of limitations for collecting student loan debts, so they can haunt you all the way into retirement. Collection costs may be as high as 45 percent—causing an already burdensome loan to become even more expensive.
If you are having trouble paying back your student loans, you may have several options for dealing with them, none of which (except cancellation) are ideal because they just put off the inevitable. In a crisis situation, however, they are better than falling behind and having your loan placed in collections.
Deferment: Federal student loans may be deferred if you are having financial difficulties. If your loan is deferred, you will not be required to make any payments during the deferment period, and no interest will accrue during the deferment period.
You cannot qualify for deferment once your student loan is in default—so don’t wait to apply if you think you are going to have difficulties making your scheduled payments. And be sure to make the regular payments until your request is approved.
Forbearance is also a possibility for borrowers who want to pay their student loans but can’t because of financial problems. If you are granted a forbearance, your payments are decreased or postponed until you are back on your feet. The drawback is that interest continues to accrue on the loan during the forbearance period.
Some student loans can actually be canceled if, for example, you are a full-time teacher in certain areas designated as teacher shortage areas or in a designated school serving low-income families, or if you are a full-time nurse or medical technician.
Small Bills: Set aside small bills, such as bills for magazine subscriptions, book clubs, or local accounts, but be sure to contact the creditor if you think the account will be turned over to collections.
All Bills: Try not to put off any bill for ninety days or more. Some creditors write accounts off as “profit-and-loss” accounts or “charge-offs” once they are ninety days or more delinquent. A profit-and-loss mark on your credit file is a very negative mark, and if you can avoid it, do.
Try to send something—even if it is just a $5 or $10 payment— to each of your creditors to show that you are trying to pay off your debt. If you completely ignore a creditor, it is likely that the account will be written off or sent to collections. Making small payments will at least signal your creditors that you are trying to get caught up. Don’t send payments to all creditors, however, if it means you will fall behind on important bills like your mortgage or car loan.
Please keep in mind that sending a smaller payment does not prevent a lender from charging off the account. If you do not make your required monthly payment, the lender may charge off the account.