Debtor and Creditor

Dealing with Debt

Are you having trouble paying your bills? Are you getting dunning notices from creditors? Are your accounts being turned over to debt collectors? Are you worried about losing your home or your car?

If you're receiving collection notices or having trouble making your house or car payment, you're not alone. Whether the crisis is caused by illness, loss of a job or simply overspending, it can be overwhelming. Take action before your situation becomes worse.

Actions to Consider

  • Realistic budgeting
  • Credit counseling from a reputable organization
  • Debt consolidation
  • Bankruptcy

How do you know which will work best for you? It depends on your level of debt, your level of discipline and your prospects for the future.

Contacting Your Creditors

One of the very first things to do is to contact your creditors if you're having trouble making ends meet. Tell them why it's difficult for you, and try to work out a modified payment plan that reduces your payments to a more manageable level.

Dealing with Debt Collectors

The Fair Debt Collection Practices Act dictates how and when a debt collector may contact you. They may not:

  • Call you before 8 a.m. or after 9 p.m.
  • Call you at work if the collector knows that your employer doesn't approve of the calls
  • Harass or threaten you
  • Make false statements
  • Use unfair practices, such as deposit a post-dated check, when they try to collect a debt

Debt collectors must honor a written request from you to stop further contact.

Developing a Budget

Taking control of your situation starts with a realistic assessment of your budget: How much comes in and how much is spent each month? Of course, conventional wisdom tells us we need to spend only as much as we bring home in pay, but sometimes it doesn't work out that way especially if an emergency arises.

Writing down all of your expenses - fixed and variable - is a good way to track spending patterns and weed out the ones that aren't important as rent, car, utilities, food, etc.

Credit Counseling

You might consider contacting a credit counselor if your debts are overwhelming you and can't determine how to fix it yourself.

Creditors might be willing to accept reduced payments by entering a debt repayment plan with a reputable company. In these plans, you deposit money each month with the service who then pays your creditors.

Successful plans require regular, timely payments and could take 48 months (four years) or more to complete. Some service providers charge a small fee or nothing for managing your finances. Others charge a monthly fee that can add up over time. There are also credit counseling services that are partly funded by creditors so you might not have to pay a fee.

While a debt repayment plan can eliminate much of the stress that comes from dealing with creditors and overdue bills, it doesn't mean you can forget about your debts. You still are responsible for:

  • Paying any creditors whose debts are not included in the plan
  • Reviewing monthly statements from your creditors to make sure your payments have been received
  • Making sure that your billing statements reflect any agreement your creditors made to lower or eliminate interest and finance charges, or waive late fees

A debt repayment plan doesn't erase your negative credit history. Accurate information about your accounts can stay on your credit report for up to seven years. A demonstrated pattern of timely payments, however, will help you get credit in the future.

Auto and Home Loans

Debt repayment plans usually cover unsecured debt, which include your auto and home loans, and may not be included. You must continue to make payments to these creditors directly.

Most automobile financing agreements allow a creditor to repossess your car any time you're in default. No notice is required. If your car is repossessed, you may have to pay the full balance due on the loan and towing and storage costs to get it back. The creditor may sell the car if you can't pay for the car or other expenses. You may be better off selling the car yourself and paying off the debt. You would avoid the added costs of repossession and a negative entry on your credit report.

The same thing can happen on your mortgage. Contact your lender immediately to avoid foreclosure. Most lenders are willing to work with you if they believe you're acting in good faith and the situation is temporary. Some lenders may reduce or suspend your payments for a short time.

When you resume regular payments, though, you may have to pay an additional amount toward the past due total. Other lenders may agree to change the terms of the mortgage by extending the repayment period to reduce the monthly debt.

If you and your lender can't work out a plan, contact a housing counseling agency.

Debt Consolidation

You may be able to lower your cost of credit by consolidating your debts through a second mortgage or a home equity line of credit. But think carefully before taking this on. These loans require your home as collateral. If you can't make the payments - or if the payments are late - you could lose your home.

The costs of these consolidation loans can add up. In addition to interest on the loan, you pay "points." Typically, one point is equal to one percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.


Bankruptcy is usually considered a last resort for managing your debt. Results are long-lasting: It stays on your credit report for 10 years. This can make it difficult to rebuild your credit by getting loans, buying a house, life insurance and, even a job. More and more companies are performing credit checks on potential employees.

There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court.

Both types of bankruptcy may get rid of unsecured debts and stop:

  • Foreclosures
  • Repossessions
  • Garnishments
  • Utility shut-offs
  • Debt collection activities

Both also provide exemptions that allow you to keep certain assets, although exemption amounts vary.

Personal bankruptcy usually does not erase:

Also, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or lien on it.

Questions For Your Attorney

  • What is I'm not able to consolidate my loans? What should I do?
  • A creditor continues to harass me even though I've told them that I can't make a payment in full. What should I do?
  • I don't know if the credit counseling organization I went to is legit. How can I tell? Can you find out?
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