What To Do If You Can’t Pay Your Bills

It’s 2012 and the economic recovery Americans have been waiting three and a half years for has yet to materialize. As economic uncertainty continues, and millions of households live paycheck to paycheck, the necessity to pay down debt has gotten stronger. However, for a growing number of people, paying down debt seems impossible when they can’t even pay all their bills on time.

It’s important to note that if you’re unable to pay all your bills, you’ll have to deal with this situation eventually. It’s always better to handle things before they get further out of control. Once you file bankruptcy, or a company begins legal proceedings against you and starts to garnish wages, you’ll lose any ability to manage the situation, so it’s wise to do everything possible to avoid those outcomes.

But first, here’s what you need to know before selecting a strategy to help you pay your bills:

Advantages of Repaying Your Debt

When you realize you’re unable to pay all of your monthly bills, the first thing you should do is determine whether you are going to pay your bills (and debt) at all. The last four years have seen the number of Credit Card defaults, bankruptcy filings, and home foreclosures spike to record levels. For some people, the thought of walking away from a home, or letting a credit card go into collections or worse, is a viable solution. While this strategy of simply not paying your creditors is one way to resolve the problem in the short term, it’s also the strategy that leaves you with the fewest options later on.

One of the reasons you’ll have so few options later is because a foreclosure, bankruptcy, car repossession, or other default will remain on your Credit Report for up to a decade. This means you need to be prepared to have ruined credit for at least 5-7 years. During this time, a car Loan, Home Loan, credit card, etc., will be difficult to come by, as will renting an apartment or getting jobs that require you to handle money.

In addition, walking away from your bills doesn’t help you in the long term because it doesn’t require that you do the difficult work necessary to build good credit habits. Not only would you be cheating yourself out of the opportunity to learn how to be a better borrower, but if you don’t learn these lessons now, you’ll be right back in an unmanageable situation before you know it. So, if at all possible resolve to pay your bills rather than walk away or declare bankruptcy.

As well, using a debt consolidation company is an option that requires you to pay back a portion of your debt, as negotiated between the consolidation firm and your creditor. While using one of these firms will help you pay less than you currently owe to creditors, and may keep creditors from contacting you, beware that debt consolidators charge a fee for their services (it’s usually a percentage of the amount of negotiated debt). For many people who are having difficulty paying their bills, debt consolidation can help save money on the principle balance and interest, but it can also be costly.

What Will Happen to Your Overall Credit Score?

If you are in a position where you cannot pay your bills, your credit score will likely suffer. Of course, missed payments for certain bills will affect your score more than others. That is because different creditors report delinquencies (damaging your score) at different speeds. Missing one or two car payments may result in a repossession, and will certainly be reported to the credit bureaus, while other creditors allow you to be much more delinquent before real consequences begin. For example, it may take as long as 60-120 days for the consequences of late credit card, student loan, and medical bill payments to impact your credit.

Additionally, using a debt consolidation firm, establishing specialized repayment plans, or negotiating a Mortgage modification will all raise red flags for your creditors that you may not be able to repay your debt right now (which is true). Thus, a failure to repay will always result in notations to your credit report, and decreases in your score. That is why the goal here is to find strategies to repay most of your bills, with the least long-term impact to your credit.

The following articles offer advice on what to do when you can’t afford to pay all of your bills, including finding more income and/or strategically delaying payment to certain creditors. For most people, a combination of these options will provide some relief until a permanent solution becomes available.

Next: Don’t Ignore Creditors

Resource(s): Federal Trade Commission report for consumers