Dealing With Creditors When You are Late on Payments

Falling behind on your bills can be financially crippling. It is one of the most devastating life experiences in life. Several circumstances in life cause individuals to fall behind on their obligations. For most, it is job losses. For others, it is an inability to secure a job or a low-paying job. Divorcees also experience late payments because of financial disruption because a shared income supports most bills.

Whatever the reason, it is crucial to seek help to manage your finances. It starts with evaluating your debts and expenses against your income. You can take several steps to help you deal with creditors whose bills fall due. Here is a look at some of them.

Develop a Budget and Prioritize Your Spending

You need a proper and honest assessment of your finances. You must determine your income, expenses, assets, and liabilities. All these aspects should be addressed when formulating a budget.

It is best to start with liabilities, which simply refer to the sum you owe. This includes car payments, personal loans, credit card debt, and mortgages. Classifying them when they fall due is best. Thus, you will have:

• A long-term category containing low-interest loans whose due date is after one year or
• A short-term category, which will consist of high-interest loans due in one year

Alternatively, you can use the interest-charged approach. Under this approach, you prioritize interest-charging loans like car loans followed by non-interest-charging loans like loans from family and friends. Either approach requires you to state the amount owed, the interest charged on each sum, the repayment period, and the due date. This will help you prioritize your payments.

Do not forget your daily expenses. These include fuel costs, rent, electricity, heating changes, and food and water needs. School fees also fall into this category, though they are not daily expenses. Attaching figures to all your running household expenses offers perspective on the expenses you can reduce or eliminate or those that will remain unchanged.

As for income and assets, the two fund your lifestyle. They pay for your expenses and liabilities. A proper evaluation of how much income flows into your household will help you determine what aspects your income can fund and whether you need to change jobs, work extra hours, or look for an additional source of income.

Assets generate income. For example, stocks earn dividend income, and you could also sell them at a premium to make a profit if the current share price exceeds the price you bought the stocks at. Factoring in assets into your evaluation will help you determine whether you are comfortable with the income your investments generate or if you will need to liquidate them to meet your budget’s shortfall.

Once your assessment is done, you should then prioritize your spending.

Determine the Sum Left for Debts

The rule of thumb is to pay yourself first with every income. Prioritize your savings plan and running expenses before paying for your liabilities.

Budgets put your finances into perspective. In some situations, a reorganization of your finances is all you need to deal with your creditors. Once you develop your budget, it could be evident that you are in better shape than you thought and have some extra money after paying yourself. If so, stick to your budget and honor your monthly debt payments.

In other situations, developing a budget could reveal a deficit. You have little to no extra income to pay your creditors. This situation calls for cost-cutting. You must decide which expense categories you can do without or reduce them. In most household budgets, rent, fuel expenses, leisure, and clothing are the significant contributors to a budget high in expenses with less income to support the expenditure. Do not be afraid to:

• Rent out in a cheaper neighborhood
• Cut down on travel and leisure until you are comfortable paying for the trips without negative implications for your finances
• Consider selling your car, opting for carpooling, or exchanging your current vehicle for hybrid or electric options to save on your fuel and car payment expenses
• Buy clothes only when a need arises — This short-term adjustment will help you save more. Additionally, consider selling clothes, shoes, or jewelry you rarely use to generate an income to fund your budget.

After taking care of your running expenses, use the remaining net income to pay your creditors. Should the expenses exceed your income, consider the following additional solution.

Supplement Your Income

An inventory of your finances will be revelatory. When you are behind on your bills, your expenses exceed your income in most situations. Cutting down on your costs is not enough. You will also need to find additional sources of revenue.

One bold move you can opt for is seeking a better-paying job. It is not uncommon to find individuals with the requisite experience and qualifications working in positions that pay less than their qualifications. The assumption of security their jobs offer could make certain employees forgo the risk of losing their current positions for better-paying jobs. Securing a better income could be the solution you need to meet your obligations and finance your lifestyle without too much strain on your budget.

Alternatively, you could explore earning opportunities at your current place of employment. For overtime purposes, the legal working hours are 8 a day or 40 hours a week. Therefore, you could approach your employer to secure additional hours to benefit from overtime pay. This extra income is significant.

If overtime is not an option, consider looking for an additional job to earn extra income. You can clock in eight hours a day and find a different job for the remaining hours. Further, you can sacrifice your off-days and work at another job to increase your income. Whereas this sacrifice could be upsetting in the short-run, the sacrifice will pay off since it will help you get caught up with your bills and leave you with extra income.

Setup a Payment Plan

Contact your creditors and explain your situation. From there, you can work out a payment plan. Debt repayment plans help individuals remain on course to clear their obligations. Additionally, the plans help you stay motivated, thus speeding up the repayment process.

There are steps you should consider when developing a repayment plan. They include the following.

1. List All Your Debts

It bears emphasizing that you need to list all your debts. Your debt list should include the total amount owed, the renegotiated interest rate or due date, and the interest each debt accrues. Further, the cumulative amount should factor in the principal amount, the interest accrued, and the interest likely to accrue before the debt is fully settled.

2. Rank Your Debts

Repayments require a debtor to rank the debts in order of repayment. The order will vary depending on several factors, including income, expenses, financial responsibilities, and the interest each debt accrues.

Interest-charging loans like auto loans, student loans, credit card debt and personal loans take priority over non-interest-charging loans like loans from friends and family. It is best to pay off loans with an interest charge since they accrue over time and will be expensive in the long run.

Further, prioritize the loans with a high-interest rate before the loans with lower interest charges. This method is called the debt avalanche method. Under this approach, you pay off the most expensive debt before the less expensive debt.

3. Use the Extra Income to Pay Off the Debts

Your extra income will be pivotal in clearing your debt. You can use a portion of your additional income for debt repayment or commit your entire extra income to pay off your debt. But ensure you adhere to your budget. Only then can you make significant progress with this plan.

4. Focus on the Debt Clearing Timeline

Debt timelines are critical because of the interest factor. Payments on time help you clear the debt early without incurring extra interest expenses. When you miss the deadline, you will increase your interest expense, thus adversely impacting your repayment plans.

Note: The debt timeline depends on your repayment approach. If you focus on one debt at a time, you agree to bear the interest burden on the remaining unpaid debts. Should you decide to pay off all the debts at the same time while prioritizing more payments to the most expensive debt, you accept to extend your repayment period over a longer repayment period. However, the primary focus is on honoring the dates to help you realize the plan's benefits.

Maintain Your Current Mortgage Plan

Mortgage payments should not be compromised. Paying off other loans should not be the reason you lose your home. The risk of being homeless is one every homeowner should consider. Further, losing your home could also upset your overall financial position. It is, therefore, best to make regular payments.

Most lenders are willing to renegotiate the terms of the house payment. They have several options available to their clients facing financial hardships and are behind on their payments.

However, you can only access these benefits by taking action on the following tips.

1. Call Your Lender

Take the initiative to call your bank and explain your situation. The foreclosure process and expenses are expensive for the banks and debtors. Therefore, engaging your bank early and ascribing your case will help you avoid foreclosure since it is in your and the bank’s interest to avoid foreclosure.

Your engagement with your lender will result in a payment plan with the added advantage of forbearance. Your bank will temporarily put your mortgage on hold. The bank will suspend or reduce your payments for a specific period, after which you resume repayments through a lump sum payment or installments.

Note: Any conversations with your lender should remain respectful. Engage your lender persistently, but be patient. Do not become overbearing. Make follow-ups only on the agreed dates or after the grace dates have passed without communication from your lender.

2. Changing the Terms of Your Mortgage

If you find difficulty maintaining the current mortgage terms, you can communicate the same to your lender. Banks have several solutions for this.

• Mortgage modification — Lenders will, in some situations, agree to modify the mortgage terms. Banks either extend the repayment period or lower the interest rates on loans. Both options lower your monthly payments.

• Refinancing — Banks could decline to modify the terms of your mortgage. In this case, refinancing is the better option. Under refinancing, you access another loan with more favorable terms and use the proceeds of the new financing to offset the previous loan.

• Principal reduction — Lenders can also reduce the principal value of your loan based on underwriting and the home's actual value. By doing this, your loan value is reduced, and so are your monthly payments. Credit facilities opt for principal reduction to avoid total loss in a significant economic downturn.

3. Stick to the Plan

It is in your best interest to adhere to your budget and the plan as agreed with your lender. As difficult as it could be, failing to honor the agreement will most certainly result in losing your home. Furthermore, your credit score will be negatively affected, which will not help your financial position.

4. Seek Outside Assistance

Conversations with lenders could not necessarily help you out since they look to secure their interests. You can therefore look for guidance from other individuals, like a HUD-approved counselor.

HUD stands for Department of Housing and Urban Development.

HUD counselors are government-trained and certified professionals tasked with assessing an individual’s financial situation and developing available options that the individual can use as solutions. These counselors help individuals facing challenges in paying their mortgages. Further, the counselors help individuals develop a mortgage payment plan.

5. Sell Your Home

If all else fails, selling your home is always an option.

There are situations where the solutions mentioned above do not help debtors get caught up with their mortgage payments. In these situations, selling the home becomes their only option. Your lender must approve the decision before you can list your property. Therefore, you should have a conversation with your lender if you decide to pursue this option.

Most people sell their homes for less than the amount they owe. Lenders agree to this to avoid foreclosure on the property.

Debt Settlement vs. Bankruptcy

Debt settlement is a solution that all parties involved in it benefit from. Debtors pay their debt and save money while creditors receive the amount owed. This approach is different in bankruptcy.

Bankruptcy is the legal process of declaring that a debtor cannot repay the outstanding obligations. The process commences when an individual, the debtor, or a creditor files bankruptcy proceedings. Creditor-initiated bankruptcy proceedings are less common. Debtor-initiated bankruptcy accounts for a significant portion of bankruptcy cases.

When debtors file for bankruptcy, the debtor stops paying the debt altogether until a plan is devised and agreed upon during the process. Once a bankruptcy application is granted, creditors are stopped from making calls or using other debt collection methods.

As a debtor, bankruptcy is the last option. You can consider filing for bankruptcy to seek relief because you cannot pay the outstanding debt. Should you choose this option, you risk losing your assets since bankruptcy offers an asset liquidation option. The assets will be sold off, and the sales proceeds will be used to settle your outstanding sums.

Note: While bankruptcy helps eliminate several outstanding bills like credit card debt, overdue utility bills, personal loans, medical bills, car payments, and others, it does not discharge all your debts.

Non-dischargeable debts include the following. The list is, however, not exhaustive.

• Alimony and child support payments
• Specific taxes
• Student loans
• Unscheduled debts
• Fees due from child custody and support cases
• Debts owed to government agencies, including fines and penalties

Selecting the Right Bankruptcy Option

It is best to seek advice from an experienced attorney on the best bankruptcy option to pursue based on your situation and intention.

There are four bankruptcy options: Chapter 7, 11, 12, and 13. However, Chapters 7 and 13 are the best options for individuals with outstanding loans.

1. Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the first choice for many since, within a few months, you will have discharged most, if not all, of your debt. It is referred to as liquidation bankruptcy.

With this option, the court liquidates your assets to pay your creditors. You can, however, retain exempt assets.

You need to pass the means test to qualify for this bankruptcy option. Talk to your attorney to see if you are eligible for Chapter 7 bankruptcy.

2. Chapter 13 Bankruptcy

Chapter 13 bankruptcy requires debtors to pay off their debt using repayment plans. Individuals can clear their outstanding debts within three to five years. This bankruptcy option allows you to retain your assets, save your car from repossession, and avoid foreclosure on your home.

This chapter is expensive since you spread your debt repayment over several years through monthly repayments. However, it is a viable option for individuals keen on retaining their properties.

Engage a Bankruptcy Attorney Near Me

When you are behind on your payments, do not worry. From the information above, you have several options available to help you get caught up on your payments and clear your outstanding bills. However, if you consider bankruptcy an option, talk to an experienced bankruptcy attorney. For assistance, contact the Los Angeles Bankruptcy Attorney team today at 424-285-5525.