When You Can't Pay Your Debts FAQ
Strategies to help you get out of debt.
I feel completely overwhelmed by my debts and don't know where to begin. What should I do?
Take a deep breath and realize that your creditors may want to help you. Whether you're behind on your bills or are afraid of getting behind, call your creditors. Let them know what's going on -- job loss, divorce, medical problem, or other troubles -- and ask for help. Suggest possible solutions such as a temporary reduction of your payments, skipping a few payments and tacking them on at the end of a loan, skipping a few payments and paying them off over a few months, dropping late fees and other charges, or even rewriting a loan.
If you need help negotiating with your creditors, consider contacting a non-profit debt counseling organization, such as Myvesta.org (formerly Debt Counselors of America), or a local Consumer Credit Counseling Service office (to find one near you, visit the National Foundation for Credit Counseling at http://www.debtadvice.org).
I might have to miss a car payment. Should I just let the lender repossess?
No. Before your car payment is due, call the lender and ask for extra time. If you're at least a few months into the loan and haven't missed any payments, the lender will probably let you miss one or two months' payments and tack them on at the end. If you don't pay or make arrangements with the lender, the lender can repossess without warning, although many will warn you to give you a chance to pay what's due.
If your car is repossessed, you can get it back by paying the entire loan balance and the cost of repossession, or, in some cases, by paying the cost of the repossession and the missed payments, and then continuing to make payments under your contract. If you don't get the car back, the lender will sell it at an auction almost always for far less than it's worth. In most cases, you'll owe the lender the difference between the balance of your loan and what the sale brings in.
If you are far behind on your car payments and can't catch up, the truth is that you may not be able to afford the car. Under these circumstances, you should think about voluntarily "surrendering" your car before the dealer repossesses it. This strategy can save you expensive repossession costs and attorneys' fees. Because it also makes life easier for the dealer, you should try to get concessions from the dealer before you give up the car. A dealer will often waive its right to collect the amount left owing on the loan and/or promise not to report the default or repossession to credit bureaus. Try to get the dealer to agree not to report negative information to credit bureaus in return for your voluntarily surrendering the car. Negative information (such as a surrender, default, or repossession) will appear on your credit report for seven years, and will affect your ability to get credit in the future.
How soon after I miss a house payment will the bank begin foreclosure proceedings?
This varies from state to state and lender to lender, but most lenders don't start foreclosure proceedings until you've missed four or five payments. Before taking back your house, most lenders would rather rewrite the loan, suspend principal payments for a while (have you pay interest only), reduce your payments, or even let you miss a few payments and spread them out over time.
If your loan is owned by one of the giant U.S. government mortgage holders, Fannie Mae or Freddie Mac, foreclosure could come even more slowly. Fannie Mae and Freddie Mac have been working with homeowners to avoid foreclosure when a loan is delinquent.
If your loan is insured by a federal agency, such as the Department of Housing and Urban Development (HUD) or the Federal Housing Administration (FHA), the lender may be required to try to assist you in preventing foreclosure.
If foreclosure is looming, might I be better off just selling my house?
You're better off selling the house than having it go to foreclosure. As a general rule, if you can find a buyer who will offer to pay at least what you owe your lender, take the offer. If the offer is for less than the amount you owe your lender, your lender can block the sale. But many lenders will agree to a "short sale," in which the sale brings in less than you owe the lender and the lender agrees to forego the rest. Some lenders require documentation of any financial or medical hardship you are experiencing before agreeing to a short sale.
My utility bill was huge because of a very cold winter. Do I have to pay it all at once?
Maybe not. Many utility companies offer customers an amortization program. This means that if your bills are higher in certain months than others, the company averages your yearly bills so you can spread out the large bills. Also, if you are elderly, disabled, or have a low income, you may be eligible for reduced rates. Ask your utility company.
When can a creditor garnish my wages, place a lien on my house, seize my bank account, or take my tax refund?
For the most part, a creditor must sue you, obtain a court judgment, and then solicit the help of a sheriff or other law enforcement officer to garnish wages. Even then, the maximum the creditor can take is 25% of your net pay, and you can protest that in court if you can't live on only 75% of your wages.
In three situations, your wages may be garnished before you are sued:
• The IRS can take everything but about $100 per week.
• The Department of Education can garnish up to 15% of your wages and a state guarantee agency can garnish up to 10% of your wages if you're in default on a student loan.
• Up to 50% of your wages can be garnished to pay child support or alimony.
To place a lien on your house or empty your bank account, almost all creditors must first sue you, get a judgment, and then use a law enforcement officer. A few types of creditors, such as an unpaid contractor who worked on your house, can put a lien on your house without suing. And the IRS can place a lien or empty your bank account without suing first.
Your tax refund cannot be taken unless the Treasury Department receives such a request from the IRS, the Department of Education, or a child support collection agency.
Can I go to jail for not paying my debts?
Debtors' prisons were eliminated in the United States by 1850. In a few unusual situations, however, you can still be jailed if you:
• willfully violate a court order, especially an order to pay child support
• are convicted of willfully refusing to pay income taxes, or
• are about to conceal yourself or your property to avoid paying a debt for which a creditor has a judgment against you.
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