If you live from paycheck to paycheck as many Americans do, one large, unexpected expense could put you in a position where you cannot pay your bills. If you fall behind on payments to your creditors, you may ultimately face a lawsuit, with subsequent judgments and wage garnishments. Before you get to this point, explore some strategies to get your creditors off your back and to get out of debt.
Budget
If you have only recently discovered that you cannot make your debt payments, you may still have time to budget your way out of your situation. Write down all of your expenses and compare them with your income. If you are only a little bit short of the amount needed to pay your debt, take a close look at where you can cut expenses, be it from your cell phone bill, your cable television service or from eating out or entertainment expenses. If you can trim back your expenses enough to save enough money to make your payments, you can avoid future legal action.
Negotiate Your Terms
Your creditors are in the business of making money, not doling out charity. However, if you cannot find a way to make even your minimum debt payments, your creditors may be open to the business decision of negotiating the terms of your debt. Ask for a reduction in your interest rate and the minimum payment required. Aim for a payment structure you can legitimately afford. If your creditors see that you are willing to pay all that you can, they may be willing to adjust the terms of your debt.
Settle
If you cannot afford to pay your debt even with a lowered interest rate and payments, you may have to try to settle your debt for less than you owe. Creditors are generally much less willing to negotiate down your actual balance than simply your interest rate, so you may have to make a compelling case. Ironically, you probably stand a greater chance of settling your debt for less than you owe after you have missed a few months of payments. Your creditors may be willing to accept something from you rather than nothing if it appears you are unwilling or unable to pay.
File Bankruptcy
The most dramatic step you can take if you can't pay your debts is to file bankruptcy. In bankruptcy, you essentially walk away from your debts, and the court discharges the amount that you owe your creditors. If you honestly can't pay your debts, this may be a better business solution for you than settlement, because in bankruptcy, you do not have to pay tax on the amount of your discharged debt. In a debt settlement, the amount of canceled debt is usually taxable income to you.
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