Surviving a Financial Crisis
By: Financial Hotline
Winter 2020 (Vol. 37, No. 4)
If you are having trouble paying your debts, it is important to take action sooner rather than later. Doing nothing leads to much larger problems in the future, whether it’s a bad credit record or bankruptcy resulting in the loss of assets and even your home. If you’re in financial trouble, then these steps will help you to avoid financial ruin in the future.
If you’ve accumulated a large amount of debt and are having difficulty paying your bills each month, now is the time to take action - before the bill collectors start calling.
REVIEW EACH DEBT. Make sure that the debt creditors claim you owe is what you actually owe and that the amount is correct. If you dispute a debt, first contact the creditor directly to resolve your questions. If you still have questions about the debt, contact your state or local consumer protection office or, in cases of serious creditor abuse, your state Attorney General.
PRIORITIZE YOUR DEBTS. Secured debts or service debts have swifter consequences than unsecured debt. If you have a cash flow emergency, you need to have a survival plan in place. Know which payments must be made first. For example, if you don’t make your rent or auto payment, you may lose a place to live and means of transportation very quickly. However, if you postpone a credit card payment you may lose the right to credit.
CONTACT YOUR CREDITORS. Let your creditors know you are having difficulty making your payments. Tell them why you are having trouble, perhaps it is because you recently lost your job or have unexpected medical bills. Try to work out an acceptable payment schedule or short term deference with your creditors. Many are willing to work with you.
Most automobile financing agreements permit your creditor to repossess your car any time you are in default, with no advance notice. If your car is repossessed, you may have to pay the full balance due on the loan, as well as towing and storage costs, to get it back. Do not wait until you are in default. Try to solve the problem with your creditor when you realize you will not be able to meet your payments. It may be better to sell the car yourself and pay off your debt than to incur the added costs of repossession.
REVIEW ALL EXPENSES. Itemize your necessary expenses (such as housing and healthcare) and optional expenses (such as entertainment and vacation travel).
TRY TO REDUCE YOUR EXPENSES. You may have to cut out optional expenses entirely until you can get back on track. Consider taking public transportation or using a car-sharing service rather than owning a car. Clip coupons, purchase generic products at the supermarket and avoid impulse purchases. Above all, stop incurring new debt. Leave your credit cards at home. Pay for all purchases in cash or use a debit card instead of a credit card.
PAY DOWN AND CONSOLIDATE YOUR DEBTS. Withdrawing savings from low-interest accounts to settle high-rate loans or credit card debt usually makes sense. In addition, there are several ways to pay off high-interest loans, such as credit cards, by getting a refinancing or consolidation loan, such as a second mortgage. Keep in mind, however, that second mortgages greatly increase the risk that you may lose your home. Be wary of any loan consolidations or other refinancing that actually increase interest owed or require payments of points or large fees.
You can regain financial health if you act responsibly. But don’t wait until bankruptcy court is your only option. If you’re having financial troubles, help is just a phone call away.