Article at a GlanceBeing unable to pay your bills is stressful. If you can’t pay them all, should some be prioritized?
For most people, debt is a fact of life. In California, the per capita household debt during the first quarter of 2021 was about $73,000.
If you’re living paycheck to paycheck, a minor disruption like an unexpected medical expense or a week without work can break the budget. For many people, that means tough choices about what to pay and what to let slide. There are a lot of variables. Maybe you have three relatively small credit card payments due, and if you miss them you’ll get hit with three hefty late fees. But, you’re already a little behind on your car payment, and you can’t risk repossession without putting your job at risk.
The decision is often further complicated by creditors and debt collectors. They, of course, don’t care what’s best for your budget in the long run. Their job is to extract payment from you as quickly as possible. It’s hard to stand up to that pressure. Too often, that means limited resources go to the most aggressive collector rather than to the debt that should have highest priority.
Just like when you’re negotiating with creditors, preparation can be your best defense.
What to Do When You Can’t Pay Your Bills
The first step toward managing debt in a crunch is to stop and assess. That’s actually the first step toward effective solutions in most areas of life. But, it’s a step people often skip when they’re under pressure.
Inventory Your Available Resources and Know What You Owe
Before you make any decisions about who to pay and when, get organized. That means:
- Determine exactly how much money you have to work with. Usually, it makes sense to break this out by month, since that’s how most bills and debt payments break out. Be sure to deduct any money you need to set aside for non-negotiable items like food and necessary medication.
- Add up all of the bills and debt payments that will come due during that time period. Include amounts that are already past-due.
- Compare the numbers. If the amount you need to pay is greater than the amount you have to spend, you can calculate exactly how much you’ll have to cut back or delay to get through the month.
Prioritize Your Obligations
Once you have a complete list of obligations and you know how much you can afford to pay, consider the consequences of delaying or skipping each payment. Some of the variables to consider include:
- Whether essentials are at risk. For instance, could you be evicted, face automobile repossession, have your utilities disconnected, or otherwise destabilize your life by missing your due date? Remember that this will depend not just on the type of debt, but also on the terms of your contract and how far behind the skipped or delayed payment will put you. There’s no one-size-fits-all answer, but most people choose to prioritize obligations that protect essentials like housing and transportation.
- How expensive it will be to miss a payment. Late fees and interest rates can vary significantly. They can also add up fast if you make multiple late payments in a month. When the essentials are covered and you’re deciding how to divide up remaining funds, calculate how much extra you’ll pay if you push back each payment. The last thing you need when you’re trying to catch up is mounting late fees and interest. So, consider the cost of late payments when you’re prioritizing.
- How a missed or late payment will impact your credit. Late payments look bad on your credit history and can impact your credit score. Lower credit scores can mean limited access to credit, or that lenders will charge higher fees and interest rates. But, not everyone you make payments to reports to credit bureaus. Who reports to credit depends in part on whether you have signed up for Experian Boost, so be sure to take that into account when making this assessment. And, most report just once a month, so a payment that is a week or two late may not always impact your credit.
Talk to Your Creditors
Before you skip a payment and incur a late fee, a derogatory credit entry or other negative consequences, pick up the phone. No one likes talking to creditors and debt collectors, and many people assume it’s pointless. But, it’s in the creditor’s best interest to keep you on track so you don’t abandon payment entirely. Options will vary depending on the type of debt, your current circumstances, and your payment history. Some possible options may include:
- Deferring a payment or two until the end of the loan. This option is most often available with larger, longer-term debts like student loans, mortgage loans, and auto loans.
- Breaking up the past-due amount into monthly installments. This option is most common with ongoing obligations like utility bills. You may be asked to make a small down payment and then pay a percentage of the past-due amount along with your regular monthly bill for a few months.
- Eliminating fees that are making it harder to catch up. If you have a solid history, you may find that your credit card company will be willing to waive late fees you’ve accumulated to help you get caught back up, or put your account in a special program where late fees don’t accrue for a few months. Similarly, if your bank account got overdrawn slightly and started a spiral of overdraft fees that left you in a hole, your bank may be willing to waive some or all of those fees on a one-time basis to help you get the account stabilized.
These are just a few examples of the possibilities that most people never explore. It’s virtually always worthwhile to pick up the phone and ask.
Longer-Term Debt Resolution in Los Angeles
If your shortfall isn’t just a temporary crunch, it may be time to explore other options, such as Chapter 7 bankruptcy. In Chapter 7 bankruptcy, many people eliminate most of their unsecured debts, such as credit card debt, medical bills, old utility bills, payday loans and other unsecured personal loans and more.
At Borowitz & Clark, we know how important it is for you to have accurate information before you make big decisions about your financial future. That’s why we offer free consultations to people struggling with debt in and around Los Angeles. You can schedule yours now by calling 877-439-9717 or filling out the contact form on this page.