Whether you're a little short this month of seriously behind on payments, act quickly to minimize the damage of having debt you can't afford.Image source: Getty Images.
Not being able to afford to pay the bills for your debts is a scary prospect -- but it’s something that can happen to anyone. Whether you’ve taken on too much debt or have experienced a sudden decline in income, there may come a time when you simply don’t have the cash you need to send to your creditors.
If this happens to you, it’s important you react quickly to try to mitigate the damage to your credit and to your overall financial life. To help you get started, here are the steps you can take.
Try to find the cash
It may seem obvious, but if you can’t make your monthly payments, the first thing you should try to do is to free up enough money to get your bills covered. This approach is the only surefire way to avoid late fees, potential damage to your credit score, and other consequences.
Finding a side gig to bring in more income is one possible approach, or you could also try to sell non-essential items you have around the house. These may be short-term solutions, unless you have the time to keep your side gig until you’ve paid down debt to a more manageable level. These solutions can at least buy you time to put other plans for dealing with debt into action.
You should also take a very close look at your budget -- or make a budget if you aren’t already living on one. By taking control of your spending, you may be surprised how much cash you can free up to pay the bills.
Unfortunately, there are situations where finding the money is simply impossible. If that’s the case for you, you’ll need to move on to the other suggestions on this list.
Prioritize the bills you need to pay
When paying all your creditors is impossible, determine which debts you’re going to make sure you pay on time so you can put your money towards these bills first.
For most people, it makes sense to pay back secured debt before unsecured debt. This means that your first available cash should go to covering your mortgage and car loans. If you don’t pay these bills, you put yourself at risk of losing your house to foreclosure or your car to repossession. Either foreclosure or repossession will do serious long-term damage to every aspect of your life -- and both should be avoided at all costs.
After secured debts have been paid, look at the fees and penalties you could be charged by the rest of your creditors. The goal is to make the consequences of a late or missed payment as painless as possible, so prioritize paying accounts that will charge the highest late fee or that will impose a penalty APR.
You should also check out the grace periods each creditor provides. If one creditor offers a longer grace period than others, this could provide the time you need to get more money together.
See if debt consolidation is an option
If you haven’t started missing payments and your credit is still pretty good, debt consolidation is one option that could help bring your monthly payments back down to an affordable level.
When you consolidate existing debt, you secure a new loan and use the loan proceeds to repay as many of your current creditors as possible. Ideally, you’ll be able to qualify for a new loan that has a lower interest rate than your current debts. By having just one lender to pay -- and one loan at a lower rate -- it may become much easier to make your monthly payment.
You could also look for a consolidation loan that has a longer repayment timeline than your current debt. Stretching out the time you take to pay back your loan can significantly lower your monthly payments, although it does mean paying more interest since you pay for longer. Still, it may be worth incurring extra interest costs if your consolidation loan makes your debt affordable when it wasn’t before.
Contact your creditors ASAP and let them know about your financial shortfall
If you know there are creditors you aren’t going to be able to pay, you shouldn’t just skip your payment. You should contact the creditor as soon as possible and explain that you’re having a hard time and can’t pay the bill.
The creditor may be willing to put your loan into temporary forbearance if your financial shortfall is a short-term one, or may allow you to work out a repayment plan. If you’re able to work with your creditor, it’s sometimes possible to limit fees and other fallout that comes from not paying what you owe.
Consider debt settlement or bankruptcy
If you have a serious amount of debt that there’s no real way you can feasibly repay, debt settlement or bankruptcy may be your only solutions.
Debt settlement involves working out a deal with your creditors to pay back less than the current total you owe. This deal could involve making one big lump sum payment or entering into a payment plan that reduces interest and fees owed.
Creditors typically agree to settle debt only if you’ve already paid late and the creditor thinks you’re in danger of bankruptcy. The late payments and the settlement itself will hurt your credit, but at least you can stop facing month after month of being unable to pay your bills.
If you can’t escape your debt problems by settling debt, bankruptcy is an option of last resort. Chapter 7 bankruptcy allows for debts to be discharged after certain non-exempt assets are taken to pay back your creditors. Chapter 13 allows for debts to be discharged after you complete a three- to five-year repayment plan.
Bankruptcy, of course, does serious long-term damage to your credit. But it also helps you escape from the debt trap once and for all. After bankruptcy, you can get a secured card and start slowly working on rebuilding credit. This is better than continuing to throw good money away trying to pay back debt you’ll never repay completely while your credit score keeps going down because of month after month of maxed out credit cards and late payments.
The important thing is to take action
If you can’t pay your bills this month, or worry you won’t be able to pay your bills in the future, it’s imperative you take swift action. By coming up with a plan and carrying it out ASAP, you can hopefully avoid late payments, late fees, and other adverse consequences associated with failing to pay what you owe. It’s stressful to deal with, but being proactive is the best thing you can do to mitigate the damage caused by debt you can’t pay.