Just about everyone experiences a bit of financial turbulence at some point and how well you weather the storm depends on what steps you take to manage your money until it passes. Having a healthy emergency fund in place can make the ride a little less bumpy but if you’re still paying off debt, you may not have had a chance to fatten yours up yet.
If your cash flow has dwindled because of a job loss, sudden illness or another unforeseen catastrophe, keeping up with your debt payments may pose a serious challenge to your budget. Neglecting your debts, even if it’s only temporary, can be devastating to your credit but you can potentially avoid any lasting harm if you’ve got a strategy for juggling your obligations.
When You Can’t Make Your Credit Card Payment
Using credit cards to cover your every day expenses or rack up rewards is a bit like walking a tightrope and all it takes is the slightest breeze to throw you off balance. If you’re feeling a cash crunch because you got laid off or your hours have been trimmed back and you’re bringing home a smaller paycheck, paying off what you’ve charged suddenly becomes a lot more challenging.
When your wallet is stretched too thin, skipping out on paying the bill may seem like your only option but it can be a costly one if your credit score suffers. If you’re in danger of missing a payment or you’ve already fallen behind, here’s what you need to do to get back on the right course:
1. Figure out What You CAN Afford to Pay
Credit card companies typically require you to make a minimum payment of 2 to 3 percent of the balance each month. If you only owe a few hundred dollars, that’s not likely to put too much strain on your wallet but it’s a very different story if your credit card debt totals in the thousands. On a $10,000 balance, you’d be looking at a payment of $200 to $300.
Calculating how much money you can reasonably pay is the first step to dealing with the debt when your finances are feeling the pinch. Start by adding up all the costs that are necessary to meeting your basic needs. That includes housing, utilities, groceries and insurance. Be ruthless in cutting out things you can do without, such as cable TV or your gym membership.
Next, factor in your other debt payments that take precedence over the credit cards. If you’ve got a car loan, for instance, and you need the car to go on job interviews that would need to be paid first. Once you have an idea of what your budget looks like, compare that to the income you have coming in. Any money that’s left over that isn’t allocated towards a specific expense is what you can put towards your credit card debt.
2. Call Your Credit Card Company
Keeping a low profile with your credit card company when your finances are on the skids will only hurt you more in the long run. If you don’t make any effort to pay the bill, the missed payments will show up on your credit report and take a big bite out of your credit score in the process. Things can only get worse if the debt gets sent to collections since you could be sued, have your wages garnished or have your bank account seized.
Credit card companies lose if you end up defaulting so many of them offer hardship programs to struggling customers. The details of these programs vary from one card issuer to another but generally, you may be able to get your minimum payment reduced, lower your interest rate and suspend finance charges temporarily. You’ll have to be able to prove a financial hardship to qualify and you should know beforehand what kind of payment you can afford.
While a hardship program can keep you from defaulting on your credit card, there are some downsides to keep in mind. First, the credit card company may require you to close your account in order to enroll. If it’s an older account or your balance owed is close to your overall credit limit, shutting it down can knock points off your credit score.
One of the most important things to bear in mind is that you’ll need to follow the terms of the agreement to a “T”, otherwise, the credit card company could kick you out of the program. If that happens, you’d have to resume making the regular minimum payment at a higher interest rate. That could put you at greater risk of default if your financial situation hasn’t improved.
3. Consolidate Your Balances to Save on Interest
If a hardship program isn’t available, making your credit card debt more affordable is another way to get relief when money is in short supply. Transferring your balances to a card with a 0 percent rate can give you some temporary breathing room until your financial situation changes. Just know that you’ll need to be up to date on your payments to qualify for the best deal.
When shopping around for a promotional offer, make note of how long you have to enjoy a 0 interest deal and how much the fee comes to. Ideally, you’d want to stretch out the interest-free period as long as possible and pay the lowest fee. The transfer fee is typically around 3 percent of the balance, although there are certain cards that will waive it for new customers.
If You’ve Already Missed a Payment
Missing even one credit card payment can take a toll on your credit score so if you’re already a month late, you can’t afford to wait another second to take action. First, you need to bring your account current by paying the minimum amount due. If you can’t pay the minimum all at once, ask your card issuer if they’ll allow you to break it up into multiple payments.
Next, you should write a goodwill letter to your card issuer explaining why your payment was late and asking them to remove the negative mark from your credit. If you’ve always been a good customer in the past and you’re only a month or two behind, you’ve got a shot at reversing the damage to your credit. Take responsibility, explain the situation clearly and above all, be polite. At the very least, the card issuer may be willing to credit your account for any late payments or finance charges
Sticking your head in the sand when you can’t pay your credit card bills is a guaranteed way to throw your finances into even more turmoil. Facing up to the problem and tackling it head on isn’t always the most comfortable option but it’s the right move if you want to safeguard your credit.
When You Can’t Pay That Doctor Bill
Getting hit with a big doctor bill can come as a nasty shock, particularly if a health issue is keeping you from bringing home a paycheck. When funds are tight and you’re struggling to keep up with your mortgage payments or buy groceries, throwing one more expense onto the pile can throw your finances completely off track.
One option is to just ignore medical debt and hope it goes away, but that only makes the situation worse if it gets handed off to a collection agency. At that point, your credit score starts to suffer and debt collectors can take you to court to recover the balance. If medical bills are causing you stress, here’s what you can do to ease some of the financial pressure:
1. Go over the Bill with a Fine-Tooth Comb
Accepting a medical bill at face value can potentially be an expensive mistake. According to Medical Billing Advocates of America, as many as 80 percent of medical bills contain at least one inaccuracy. If you’re not taking the time to go over it line by line, you could be missing out on duplicate charges or other errors that can make the cost higher than it needs to be.
Every time you get a new bill or an explanation of benefits from your insurance company, you should review it carefully to see what you’re being charged for. If you spot something that doesn’t add up, don’t hesitate to contact the health care provider to double-check the bill’s accuracy. Even if it’s something small, it’s still worth it to get any unnecessary charges removed or corrected.
2. Double-Check Your Coverage
If you’ve looked over your medical bills and you can’t find any errors, the next step is to make sure that you’re not being charged for something that’s covered by your insurance company. This is especially important if you have more than one insurance plan.
For instance, some employers may use one insurance company for emergency care and another for doctor’s visits. If you go to the emergency room or undergo surgery, the hospital and the doctor would need to bill their services separately. If they send their claims to the wrong insurer, the bill could rebound back on you. It may only take a quick phone call to sort things out.
3. Test out Your Haggling Skills
Negotiating your medical bills down is like negotiating anything else–you have to know what your bottom line is and you can’t take no for an answer. Depending on your situation, you may be able to get some of the charges reduced or dropped altogether, either on the doctor’s end or the insurance company’s.
The key to haggling successfully is to make sure you’re talking to the right person. At the doctor’s office or hospital, that would be the person who’s in charge of medical billing. With the insurance company, you’d want to talk to whomever is handling your claim. If you’re met with resistance on either front, don’t hesitate to ask to speak to a supervisor. The more persistent you are, the more likely your efforts are to pay off.
4. Ask for More Time to Pay
Unpaid medical bills are a major source of lost revenue for doctors, hospitals and other health care providers and the last thing they want is for you to skip out on paying. In most cases, it’s possible to work out a payment plan when you’re having a rough time financially that can keep you off the radar of a debt collector.
[inline-media-netIf you only owe a few hundred dollars, the doctor may just take your word for it that you’re in a financial jam and agree to let you pay $10 or $20 a month towards the balance. If you’re staring down several thousand dollars in charges, however, you may have to prove that your hardship is genuine to qualify for a payment plan.
5. Look into Financial Assistance
If you’ve never had trouble with medical bills before, you may not know that financial help is available from a number of different sources. The Medicaid program, for example, will pay some or all of your health care costs if you qualify. You have to pass an eligibility test that’s based on your income, assets and family size and the limits vary from state to state.
Aside from government assistance, many hospitals also offer their own in-house charity care programs. Again, your income and assets factor in to whether or not you qualify but if you’re approved, you may be able to get your medical debt wiped out. These programs cover people who are uninsured, underinsured or otherwise wouldn’t be able to get Medicaid.
6. Don’t Let Medical Debt Ruin Your Credit
Medical debt typically isn’t reported on your credit history until it gets sold to a collection agency. This is the one thing you want to avoid when you can’t pay. Once a collection account shows up your credit, your score will start to lose points left and right if you’re not making any payments on what you owe. Facing a huge medical bill when you’re flat broke can feel like the end of the world, but it doesn’t have to be if you know how to handle it.
When Your Student Loan Payment is Due
Student loan debt has grown by leaps and bounds over the last few years and if you’re one of the Americans who financed your education, you know how serious of a problem it can be. It’s particularly troublesome for 20-somethings who are trying to find their place in a tight job market or have jobs but are stuck earning at the lower end of the pay scale.
If you’re struggling to keep up with your payments, you’re not alone. As of 2014, an estimated 7 million borrowers were in default on their loans, with the average overdue outstanding balance totaling just over $14,000. Falling behind on your loan payments can wreak havoc with your finances so if you’re teetering on the edge of default, here are some ways you can minimize the damage.
1. Call Your Loan Servicer for a Temporary Fix
Hiding from your loan servicer when you can’t afford to pay your student loans is a bad idea for a couple of reasons. For one thing, if you skip out on paying the lender will report it to the credit bureaus. Your payment history accounts for 35 percent of your FICO score calculation and late or missed payments can knock off big points. That can translate to higher interest rates down the road when you try to borrow or your application for credit could be denied altogether.
Besides that, keeping your lender in the loop can actually work to your advantage because loan servicers aren’t interested in seeing you default. In fact, you might be surprised to learn that they offer a number of options for helping you manage your debt when your income isn’t enough to cover your payments.
For instance, if you’ve only recently graduated you may be able to defer making payments beyond the initial grace period. During a deferment, no payment is due and no interest would accrue on the loans. You’d still have the option of making payments if that’s feasible for your budget but you wouldn’t be required to.
If you’ve used up your deferment period, then a forbearance may be a possibility. A forbearance is usually granted if you re-enroll in school or you’re experiencing a financial hardship and again, no payment is due. The one difference you need to keep in mind that interest will continue to add up on your loans during a forbearance period, which means your balance will be higher once you start making payments again.
2. Look into Income-Based Repayment Plans
Deferment and forbearance plans can help you out for a few months until you find a way to start earning more or lower your expenses but for some borrowers, that may not be enough. If you’re between jobs or you’re just starting your career, changing up your payment plan may be the better choice.
Unless your specify something different, your loan servicer will automatically put you on a 10-year repayment plan once it’s time to start paying the piper. While a standard plan minimizes the amount of interest you’ll pay, it also comes with a much higher monthly payment. Switching to an income-based plan allows you to mold the payments to your budget so you’re at less risk of defaulting.
For example, let’s say you have $35,000 in loan debt at an interest rate of 6 percent. You’re single and making $30,000 a year. On a 10-year repayment plan, your payments would come to $389 a month. Because of your income, you may be able to knock your payments down to $103 a month instead.
Income-dependent repayment plans give you up to 25 years to pay off your loans, after which the remaining balance would be forgiven but you shouldn’t make the mistake of taking that long to wipe them out. Going back to the previous example, an income-based plan could cost you nearly four times as much in interest over the life of the loan.
While you wouldn’t necessarily feel the pinch on a monthly basis thanks to the lower payments, that’s a huge chunk of change that could be going towards retirement or other financial goals.
5. Check to See If You’re Eligible for Loan Forgiveness or Cancellation
Aside from restructuring your repayment plan you should also consider whether getting your loans forgiven or cancelled is a possibility. The Public Service Loan Forgiveness Program, for example, offers forgiveness for federal borrowers who work in a public capacity and make 120 on-time payments towards their loans.
While you’ll still have to shell out something towards your debt, you can enroll in an income-based plan to minimize what you’re paying.
Forgiveness is also available for borrowers who work in certain fields, such as nursing or education and through nonprofit organizations like the Peace Corps or AmeriCorps. Many private companies offer forgiveness programs so it’s worth it to check with your employer to see what kind of relief may be available.
You can and should look into cancellation of your loans if extenuating circumstances apply. For instance, you may be able to get your loans discharged in full if you can’t pay because you’ve become totally and permanently disabled and are unable to work. You may also be eligible for a discharge if the school you attended has closed.
If You’ve Already Defaulted on Your Loans
Generally, you’re not technically in default on your student loans until you’ve missed between six and nine payments, depending on the lender. At this point, your credit is likely to be peppered with black marks and your loan servicer may be sending you threatening letters on a regular basis.
Since you could be subject to wage garnishments, seizure of your tax refund or even a lawsuit at this point, it pays to act quickly to resolve the issue.
If you took out federal loans, there are two things you want to do. First, you can try consolidating your loans. This just means rolling all of your debt into a single loan with one fixed rate. The advantage of consolidating is that it can reduce your interest rate and bring your payments down so they’re more affordable.
Typically, the Department of Education requires borrowers who are in default to make three consecutive, on-time payments before you can apply for a consolidation loan.
The next step is to see if you’re eligible for loan rehabilitation. This involves working with the Department of Education to negotiate a reasonable repayment plan. Generally, you have to make at least nine payments on time before the default is reversed but once your loan is rehabilitated, you’ll be able to take advantage of deferment, forbearance and income-based repayment options once again.
Not only that but the default status is removed from your credit report, which can help boost your score if missed payments caused it to take a serious nosedive. Getting out of default when you have private loans is a little trickier since private lenders aren’t required to offer the same repayment options as the federal government.
Again, your best bet is to contact the lender directly to see what kind of help is available but if your options are limited, refinancing can make your loans a little easier to manage.
Refinancing private loans is similar to consolidation in that you can streamline your payments and reduce your rate but there’s a catch. Since you’re going through a private lender your approval is based in part on your credit report and score. If your score is looking dismal, you’ll likely need a cosigner to come on board before you can get the ok for a refinance.
Missing a student loan payment can have long-lasting repercussions so it’s vital that you be proactive when you’re at risk of not being able to pay. Digging your way out of default after the fact is much more difficult so if you’re worried about missing a payment, don’t procrastinate about finding a solution now.
When There’s Not Enough to Cover Your Mortgage
If you’re a homeowner, your mortgage is likely the largest and most important of your debts. Not being able to pay it could send you into panic mode. That’s because defaulting on your mortgage loan is a much more serious offense than skipping out on a credit card bill and ultimately, you could end up facing foreclosure if you fall too far behind.
When you find yourself in the middle of a financial meltdown because of a job loss or an unexpected illness that leaves you unable to work, you don’t want your monthly mortgage payment to become a source of anxiety. Taking action sooner rather than later is the best course if you’re worried about how you’re going to pay.
1. Ask Your Lender about a Grace Period
If you haven’t missed a mortgage payment yet but you’re not sure you’ll be able to pay next month’s note on time, don’t hesitate to call up your lender to review your loan terms as soon as possible. Depending on which bank you borrowed from, you may have an additional grace period to get your payment in beyond the actual due date.
The grace period begins the first day after the payment is late and it typically covers the two weeks following the due date. If you think you can get your payment in on time before the grace period expires, you may be able to avoid any late fees or service charges. Keep in mind, however, that once you hit the 30-day mark your lender can and likely will report a missed payment to the credit bureaus.
2. Consider Refinancing If You Have Good Credit
Refinancing can make your loan more affordable but you’ll need to act fast before you rack up a string of missed payments. The bank is going to look at your credit report and score when you apply for a refinance loan and even one black mark could translate to a denial.
As a general rule, you’ll need to have at least 20 percent equity built up in the home to refinance. If the main goal is bringing your payments down, opting for a longer loan term can reduce the monthly cost. The only catch is that if you don’t refinance again at some point in the future, you may end up paying significantly more in interest by the time the loan is paid off.
Here’s an example to give you an idea of how much refinancing can save you on a monthly basis. Karen has 20 years left on a $200,000 mortgage and her interest rate is 4.75 percent. Her monthly payment is right around $1,050 but after refinancing to a new 30-year loan at 3.75 percent, it drops to roughly $925.
She’ll be saving close more than $1,400 annually on the payment, which is a big help to her bottom line but that savings comes at a price. By stretching out the loan term, she’ll pay an additional $75,000 in interest if she doesn’t do a second refinance or apply extra payments to the principal.
3. See If a Forbearance Is Available
Depending on the lender that holds your mortgage, a temporary financial hardship may qualify you for a forbearance period on the loan. While it’s up to the individual lender to decide what the terms are, you may be able to get your payments lowered or suspended completely until your situation improves.
If you’re considering a forbearance, be prepared to provide proof of your income and expenses to the lender to demonstrate your hardship status. If you do get approved, you’ll need to make up the difference once the forbearance ends. The lender may set up a separate repayment plan, require you to make a one-time lump sum payment or just tack it on to the end of the loan.
A forbearance is usually a good option if your credit isn’t good enough to qualify for a refinance or you don’t have enough equity in the home. Because you and the lender agree to suspend the payments, your credit score doesn’t suffer, which is a definite plus when you can’t pay.
4. Look into a Loan Modification
In situations where a financial setback seems likely to stick around for awhile, modifying the terms of your loan is a more permanent solution. A loan modification involves restructuring the loan so that the monthly cost is more affordable. Depending on the lender and your individual situation, that may mean lowering the payment, reducing the interest rate, getting a portion of the principal forgiven, or a combination of all three.
To qualify for the federal Home Affordable Modification Program, you have to either be behind on your mortgage payments or be close to missing one. Only homeowners who took out their loans before January 1, 2009 can apply and you can’t owe more than $729,750 on the property. Separate modification programs are available for borrowers who took out FHA, USDA or VA loans to buy their homes.
When you apply for a modification, the lender will take a close look at your income and expenses along with any extenuating circumstances to determine whether you meet the standard for a financial hardship. If you get approved for the program, you have to stick to the terms that you and the lender agree on, otherwise, your modification could be cancelled.
If You’ve Run out of Options
When you’ve exhausted all of the different avenues for holding on to your home and you’re still not in a position to keep up with the payments, it may be time for drastic measures. Having a foreclosure on your credit can haunt you for years to come so if that’s even a remote possibility, it’s time to dig in and consider other options.
First, you could rent the property out. The two obvious downsides here are taking on the headaches of being a landlord and finding someplace else to live, but you shouldn’t count it out right away. If your new housing costs are substantially cheaper than your mortgage and the rent you’re charging is more than enough to cover the payment, that’s a win-win for your wallet.
Selling the home outright to eliminate the mortgage altogether is another possibility but that may not be doable if you’re underwater. In that scenario, asking the lender to agree to a short sale allows you to escape foreclosure. The biggest drawback of a short sale is that it does take a swipe at your credit, but it’s not as harmful as a foreclosure.
Finally, you could agree to a deed-in-lieu of foreclosure if you can’t get the lender to give a short sale the thumbs up. This basically means that you sign the property back over to the bank and they can then sell it to try and recoup some of the loss. That doesn’t mean, however, that you get to walk away scot-free.
The Mortgage Forgiveness Debt Relief Act allowed homeowners to exclude mortgage debt forgiven through a deed-in-lieu or short sale from their taxable income but the act expired at the end of 2014. Unless it’s retroactively reinstated, you could get stuck with a big tax bill if part of your loan balance is written off because of you gave up the home.
Watch out for Scams
If you’re desperate to get help with your mortgage, you need to keep a wary eye open for scammers who are all too willing to take advantage of your situation. Before you apply for a refinance loan or attempt a modification, do your homework to make sure the company you’re working with is legit. Remember, if something seems too good to be true, it probably is.