It’s not unusual in today’s economy to live from paycheck to paycheck. If you’re one of the many whose funds run out before all the bills get paid, you might want to consider filing for bankruptcy. But, if you’re not ready for that step, there are actions you can take to keep a bad situation from getting worse.
How Filing for Bankruptcy Can Help
People who don’t have money to pay bills have to deal with constant collection attempts. Bankruptcy can stop things like:
- harassing phone calls
- collection letters
- wage garnishments (deductions from your paycheck)
- bank levies (a creditor takes money out of your account), and
- property seizures.
Chapter 7 bankruptcy. Most people without much money can file for Chapter 7 bankruptcy. In four to six months, your qualifying debt—such as credit card balances, medical bills, and personal loans—gets wiped out without paying anything to creditors. You can usually keep the debts you want, too, such as a car loan and mortgage. The trade off with Chapter 7 bankruptcy is that you might lose some property if they aren’t protected (exempt).
Chapter 13 bankruptcy. If you have too much income or property for Chapter 7 bankruptcy, you might do better with a Chapter 13 repayment plan. A repayment plan gives you three to five years to make payments to your creditors. Also, a plan will allow you to use your income to catch up car payments and mortgage payments while paying less (or nothing) to many of your other creditors.
(Find out more in Choosing the Right Type of Bankruptcy: Chapter 7 or 13.)
Do You Need to File for Bankruptcy?
Just because you don’t have any money doesn’t mean that you need to resort to filing for bankruptcy. You might be “judgment proof,” meaning that you don’t have any income or property that a creditor can take from you.
For instance, someone without any property whose only source of income is Social Security might fall into this category. If you find yourself in a similar situation, and it doesn’t appear that anything will change in the foreseeable future, then it’s likely that you don’t need to do anything at all.
(Learn more by reading What It Means to Be Judgment Proof: Your Creditors Can't Collect From You.)
If Bankruptcy Isn’t Right for You
If you have something to pay, but not much, you can take steps to get into a better financial place.
Making a Budget
Figuring out how to pay your bills requires you to look carefully at your budget. To do so, you’ll want to:
- make a list of your expenses
- prioritize your debts by importance (rent or mortgage payment, food, and utilities usually come first), and
- determine whether you can minimize or eliminate all other expenses.
Remember that lenders will often work with you if you fall behind on a car or mortgage payment. Mortgage lenders will often work with homeowners on a modification plan. Your car lender might let you skip a payment or two and tack it onto the end of the loan.
Examining Your Income
Determine whether you can make more money. Some ideas include:
- working overtime
- getting a side job
- selling property, or
- renting out a room.
You’ll likely want to avoid borrowing money—especially payday loans. The high-interest rate will probably create more problems than it will solve.
Talking to Your Creditors
If you don’t communicate with your creditors, they’ll have no choice but to think that you aren’t going to pay. Staying in contact with them lets them know that you are trying. Consider doing the following:
- explaining your situation
- requesting a payment extension
- finding out if you can skip a payment, or
- asking for a waiver of fees or an interest rate reduction.
A utility provider will often offer a payment plan, especially during peak heating and cooling months. If you owe medical bills, payment plan options might be available. Many hospitals have programs that may even forgive part, or all, of your bill.
If you owe student loans, contact your lender right away. Student loan lenders have many different repayment options available that depend on your income and household size, especially if they are government loans. Contact them, explain your situation, and ask about the available plans.
Seeking Outside Help
A debt counseling agency can help you create a budget to dig out of debt and negotiate with your creditors. If you decide to take this approach, you’ll want to select a non-profit member of a reputable group, like the National Foundation for Credit Counseling or the Financial Counseling Association of America. Consider checking with the Better Business Bureau, too.
Questions for Your Attorney
- I haven’t paid any creditors in a long time—can my creditors still collect from me?
- Should I file for Chapter 7 or 13 bankruptcy?
- Do I have enough income to make a monthly Chapter 13 payment?
- Can you recommend a debt counseling agency?