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Other Options When You Can’t Meet Your Financial Obligations header image

Other Options When You Can’t Meet Your Financial Obligations

You have studied your financial picture carefully, and you realize that there is simply no way to make ends meet. You just can't pay all your bills. Maybe you're not ready to consider filing for bankruptcy and you don't want to use a credit counselor. What can you do? Fortunately, there are many steps you can take on your own to deal with your debt problem.

Reduce monthly payments

When you find yourself in financial trouble, your immediate concern should be to slash your cash outflow as much as possible. If you've been prepaying your mortgage, car loan, or other debts, put that plan on hold, at least temporarily. If you've been making more than the minimum payment on your credit cards, scale back to minimum payments until you get your finances straightened out. This small step may be enough to solve your problems, especially if your financial troubles are temporary in nature. Make sure you can comfortably make the required monthly payments on all your bills before you go back to making larger payments. If you don't have enough money to make even minimum payments, you'll need to take further action.

Consolidate debts

When you consolidate your debt, you take out one large loan to pay off all your smaller existing loans. This leaves you with one loan payment rather than many.

One of the main advantages of consolidation is that your monthly payment on the consolidation loan is substantially lower than the combined payments of the smaller loans. In addition, you may be able to lower your interest rate.

There are also disadvantages to loan consolidation.  For example, the repayment term of a consolidation loan may be longer than the terms on your smaller existing loans. This means it will take longer to get out of debt. Additionally, you could lose any collateral you provide for a consolidation loan if you default on the loan.

Refinance

Almost any type of loan can be refinanced: mortgages, car loans, personal loans, even credit cards. When you refinance, you take out a new loan and using the proceeds to pay off the old loan.  For example, when you refinance a car loan, you take out a used car loan from the new lender, and the new lender sends the loan check to your old lender to pay off your existing loan.

The main objective of refinancing is to lower your interest rate, thereby reducing your total repayment amount. However, when you are having difficulty meeting your financial obligations, your goal is more likely to reduce monthly payments. Refinancing to a lower interest loan can lower your payments slightly. But to get the desired results, you may have to extend the term of your loan. For example, if you have 24 payments left on your car loan, you might have to refinance to a 36-month or 48-month loan in order to substantially reduce your monthly payment amount. If you do this, your monthly payments will be less, but it also means it will take longer to pay off the loan. You should consider this a temporary measure. Once you have regained your financial stability, you should either refinance again (to a loan with a shorter repayment term) or prepay the loan by making extra payments or paying more than the minimum each month.

Prioritize repayments

Divide your debts into two categories

If you are unable to meet all your financial obligations, you will need to determine which of your debts are essential and which are nonessential. The general guideline is that an essential debt is one that could create serious problems if it weren't paid. Failure to pay nonessential debts would have far less serious consequences. Whether or not a particular debt is essential will be dictated by your individual situation. Common essential debts include rent or mortgage payments, utilities, child support, school tuition, car payments, unpaid taxes, medical and auto insurance, and secured loans. Nonessential debts may include credit cards, loans from friends and family members, and other unsecured debts.

Pay essential debts first

Your essential debts should obviously be paid first. If you can't pay all your essential debts, you may need to prioritize this list and move the least essential to the nonessential list. For example, if you can get around without a car, your car payment might be moved to the nonessential list.

Pay nonessential debts with any remaining money

You shouldn't pay any nonessential debts until your essential debts are all paid. If you have money left for nonessential debts, you should prioritize this list and pay the most important of the nonessential debts first.

Caution: Remember that interest and late fees on unpaid debts will continue to accumulate, making your unpaid debts even larger.

Negotiate with creditors

Why negotiate?

If you are in financial trouble but you honestly want to do the best you can to pay off your debts, you may be able to negotiate with your creditors. In order to avoid the collections process, many creditors will reduce payments, extend your repayment period, waive late fees, or sometimes even accept less than full repayment. If you can negotiate your repayment terms, you may be able to get through your financial crisis without ruining your credit record.

Notify creditors of trouble as soon as possible

One of the keys to successful negotiations is to let your creditors know about potential problems as soon as possible. Explain the situation to them (e.g., job layoff, medical emergency). Let the creditor know what you're doing to remedy the problem (e.g., looking for work, cutting costs at home). Specify whether you need a temporary fix or long-term relief, and continue to send at least minimal payments as a sign of your good faith effort.

Don't expect perfect results

Unfortunately, many creditors refuse to negotiate with debtors. You may find that some of your creditors are not willing to accept partial payments or to extend your loan term. But it is still in your best interest to make an effort to negotiate.

If you’re in over your head and unsure of what to do, contact a Farm Bureau financial advisor for advice on how to move forward.

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