Rowe, Barbara R.

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1Adapted from When Your Income Drops, written by Barbara Rowe and Denise Schroeder, PurdueUniversity Extension Service, West Lafayette, IN 47906.1February 2002 FL/FF-I-06 PLAN TO PAY CREDITORS AND PROTECT FAMILY WELFAREBarbara R. Rowe, Ph.D.Professor and Family Resource Management SpecialistUtah State University1Many circumstances can lead to a loss ordrop in income and you may be caughtunprepared, with a seemingly endless list of billsto be paid. When this happens, you want to protectyour family’s welfare but you will also have todeal with your creditors. It’s important that younot leave the decision-making to others, or tochance. Pretending you have no money problemswon’t make the problems go away. You and yourfamily must face the situation honestly. Openlydiscuss where you are financially with all familymembers, even children. When children are notincluded in planning and discussion of spendingchanges, they may develop unrealistic fears. Theymay think they are somehow bad or the cause ofthe problem. If family members have a voice inthe tough choices that must be made, they will bemore willing to follow through on them.You will want to talk to your creditors.Before you do, you need to determine how muchmoney you owe and how much money you have topay your bills. You can use worksheet 1, “DebtsOwed” to help you. Figure out how much incomeyou can count on each month and how much youneed to pay for your essential monthly livingexpenses. How long is your present financialsituation likely to last? What assets (savings, itemsthat could be sold) do you have that could be usedto pay off your debts? Then  decide which billsmust be paid first. Who Gets Paid First?You are legally obligated to pay all yourcreditors. If you can’t pay all your bills, you needto decide how much to pay and to which creditors.One way to decide is to divide all the availablemoney and pay every creditor a share of what youowe. This is probably the fairest way, but itdoesn’t always work because each creditor mustagree to reduce the amount they receive andextend the payment period.What will affect your family’s health andsecurity the most? A second method is todetermine which creditors receive the mostmoney. Think about the worst consequences foryour family if certain debts aren’t paid or if lesswere paid than the amount due. What will affectyour family’s health and security the most?Usually rent or mortgage payments, utilities, food,transportation, and medical insurance take2priority. Don’t be tempted to let medical insuranceslide when money is tight. If anyone in yourfamily becomes ill, uninsured medical costs couldbe devastating.What will you lose if the bills aren’t paid?You can lose your possessions if the creditor holdsthe title of the property as security for the loan.Sometimes furniture and large appliance loans aresecured loans. If you aren’t sure which loans aresecured, check the credit contract. Unsecureddebts may have to take lower priority temporarily,although you are obligated to pay them too.How much do you still owe on the loan?Determine how much you have paid on each loanor contract and how much you owe. If you haveonly one or two payments left to make on a loan,it’s probably a good idea to finishing paying it,getting that debt out of the way. You may be ableto return newer items or sell them to pay off thedebt. If you choose to voluntarily surrender theitem, you’ll still be required to pay the difference between the market value of the item and theamount remaining on the loan. But getting outfrom under some of your debts can reduce thepressure you feel.What interest rate are you paying? Creditcard firms charging 1.5% interest per monthwould receive 18% interest per year on the unpaidbalances. If you have a loan with a lower interestrate, you may decide to pay off the higher-interestcredit card balances first, to reduce the amount offinance charges you are paying. Check with yourlocal Extension office for information about acomputer program, “PowerPay,” that will help youdetermine different options and the costsassociated with each option. Until your financialsituation improves, destroying your credit cardsand closing your accounts may be a good idea. Atleast put credit cards away in a safe place so youare not tempted to use them.Worksheet 1: Debts OwedCreditor’sname andaccountnumberIs debtsecured? Ifso, by what?Total owed Interest rate Payment duedateDate andamount oflast paymentHas legalaction beentaken3What will happen to you if you don’t paythe bill on time? Is there a “grace period” beforethe creditor takes action to collect? Is there apenalty or charge for a late payment? Will theremaining balance need to be paid in full if youmiss a payment? Will your utilities bedisconnected or will you be evicted? If you fail torepay a debt to a family member, will there behard feelings?What legal action has been taken? If youdo not want your wages garnished or the itemrepossessed, pay the debt back as soon as possible.Contacting Your CreditorsOnce you have calculated how muchmoney your family has for monthly livingexpenses (see “Setting Spending Priorities” in thisseries) and for paying off debts, decide how muchyou can pay each creditor based on priorities youdetermined while answering the previousquestions. Put this repayment plan in writing. Nowyou are ready to contact each of your creditors toexplain your situation and work out a solution. Beprepared to explain the reason you cannot pay,your current income and prospects for futureincome, your other obligations, your plans to bringthis debt up-to-date and the amount you will beable to pay each month.Don’t wait for your creditors to contactyou. They’ll be more likely to work with you ifyou contact them first. Your past experiences withcreditors are important. If you have consistentlypaid bills when due, your creditors will be morecooperative than if you have frequently been lateor didn’t make regular payments. Creditors are inthe business of lending money and/or providingservices. They want to keep your business, butthey also want to get paid. Most creditors willwork with you to adjust your payments becausethey would rather receive smaller payments on aregular basis than to begin expensive collectionproceedings.It’s hard, but visit local creditors in person.Visit the loan officer at your bank or credit union,the credit manager of local stores, and the billingoffice of your dentist, physician, clinic, orhospital. Some businesses, such as utilitycompanies, have special counselors for customerswho can’t pay their bills. These counselors canhelp you set up a budget plan to even out yourpayments during the year. They can also tell you ifyou qualify for fuel assistance or any otheravailable programs.Contact out-of-town creditors by phone orletter (see sample below). If you telephone, writedown the name and title of the person to whomyou talked. Follow the conversation with a letter,spelling out the agreement between you and thecreditor. Keep copies of your correspondence aswell as any reply.As you negotiate with each of yourcreditors, don’t agree to any plan simply to get offthe hook. Establish a repayment plan that isacceptable to both you and the creditor. If you failto follow through on a plan that you and yourcreditor agree upon, creditors will be lessunderstanding. If you fail to make the payments,creditors may hire a collection agency to makeyou pay.Here are some alternatives to considerwhen negotiating with your creditors:• Reducing the monthly payment• Refinancing the loan• Deferring a payment for a short time if youexpect your income will increase soon• Reducing or dropping late charges• Paying only interest on the loan until youcan resume making monthly payments• Voluntarily surrendering or giving back anitem purchased on credit• Selling the item and using the cash to payor partially pay the debt (you are stillresponsible for any remaining balance)Not all creditors will be willing to acceptalternatives. If you owe a large amount of money,and if your creditors won’t accept reducedpayments or a negotiated plan, you may considertaking a debt consolidation loan. You may have toconsider more extreme alternatives such asChapter 13 bankruptcy, or as a final resort,Chapter 7 bankruptcy.4Debt ConsolidationSome people prefer to work out their ownspending plans and their own arrangements usinga debt consolidation loan. The objective of thistype of loan is to combine numerous monthly billsinto one payment. You arrange for one large loan,pay off all your creditors and make one monthlypayment to the lender.This type of loan may be useful, undercertain circumstances, when you are havingtrouble meeting current obligations. In someinstances, you can use a home equity loan for debtconsolidation. However, if you are unable to repaya home equity loan, you lose your house.With a debt consolidation loan, yourmonthly loan payment is less than the total ofindividual debts you had before. You should beaware, though, that commercial debt consolidationand home equity loans cost money and almostalways extend the life of your debts. Sometimes ittakes twice as long to pay off a consolidation loanthan it would have taken to erase each billindividually.If you are considering a consolidation orhome equity loan, contact several financialinstitutions and ask what annual percentage rate(APR) they would charge on a loan for the amountyou need. Ask what finance charges are associatedwith the loan. If you choose this route, be sure toshop around for the best terms. And don’t befooled into thinking that a consolidation or homeequity loan has solved your financial troubles.You will still need to exercise financial care untilyour income rises again.BankruptcyIf your financial affairs have deterioratedbeyond repair, bankruptcy is a last resort.Bankruptcy laws were designed to release peoplefrom crushing debts and spare them undueharassment by creditors. There are two choices forbankruptcy–Chapter 13 and Chapter 7. Chapter 13is designed for persons who wish to pay their bills,and have a source of regular income. Chapter 13allows you, under the supervision of a bankruptcytrustee, to work out a whole or partial repaymentplan, if creditors agree. Payment schedules canstretch for a period of three to five years, duringwhich time payments are made to the court.Interest charges stop on the date of the filing.People often refer to Chapter 7 as“straight” or “liquidation bankruptcy.” UnderChapter 7, a petition is filed for bankruptcy, whichincludes a list of all assets and liabilities. You areallowed to keep some property, known as exemptitems. The rest of your property, with theexception of certain personal possessions, is soldand the money is used to pay your creditors.Chapter 7 theoretically wipes the financial slateclean. However, you will still owe any back stateand federal taxes, child and spousal support, andstudent loans.If you’re considering bankruptcy, you willhave a number of decisions to make. Is bankruptcythe best solution to your debt problem?Bankruptcy will remain on your credit record forten years. If you file bankruptcy you may not beable to obtain credit for necessary purchases, suchas a car, even after your financial situationimproves. Once you have filed for bankruptcy,you are not able to file again for seven years.Utah State University is committed to providing anenvironment free from harassment and other forms of illegaldiscrimination based on race, color, religion, sex, nationalorigin, age (40 and older), disability, and veteran’s status.USU’s policy also prohibits discrimination on the basis ofsexual orientation in employment and academic relatedpractices and decisions.Utah State University employees and studentscannot, because of race, color, religion, sex, national origin,age, disability, or veteran’s status, refuse to hire; discharge;promote; demote; terminate; discriminate in compensation;or discriminate regarding terms, privileges, or conditions ofemployment, against any person other wise qualified.Employees and students also cannot discriminate in theclassroom, residence halls, or in on/off campus, USU-sponsored events and activities.This publication is issued in furtherance ofCooperative Extension work. Acts of May 8 and June 30,1914, in cooperation with the U.S. Department ofAgriculture, Jack M. Payne, Vice President and Director,Cooperative Extension Service, Utah State University.(EP/DF/02-2002)5Sample Letter to CreditorsUse this example as a guide when writing or talking to creditors.  Fill in the specifics of your family’ssituation in place of the information in parentheses.DateCompany NameStreet AddressCity, State, ZipAttention: Delinquent Account RepresentativeSubject: Your NameYour Account NumberThe purpose of this letter is to inform you that (I/ my family) am having some budgeting and debt problems. I am having trouble making my minimum monthly payment as a result of (a family crisis, a recent job loss,seasonal unemployment, etc.).  I hope we will be able to agree upon an acceptable debt restructured paymentplan.I have taken a careful look at our financial situation.  We have set up a realistic minimum budget for ourliving expenses and have developed a debt restructured payment plan.  I am hoping you will accept areduced payment.  Amounts will be increased as soon as possible until the debt is totally repaid.We owe (12 creditors over $7,500).  Our asset value is less than ($3,000).  Our only assets are (a car withBlue Book value of $1,000, some home furnishings worth $1,500 and our family’s clothing).  Our monthlyincome is ($708).  We have ($242) left over after basic living expenses for debt repayment.  I would like youto accept a partial payment of ($50) per month to repay our obligation.  You may expect the first payment on(date).I hope you will find this plan acceptable.  I look forward to your letter of acknowledgment.  Thank you.Sincerely,Your NameYour AddressYour City, State, Zip

Plan to Pay Creditors and Protect Family Welfare

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Plan to Pay Creditors and Protect Family Welfare

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