What To Do If You Can't Pay Your Bills
Many people are caught in a bad cycle of robbing Peter to pay Paul. They borrow money each month from one source in order to pay the minimum payments on other items. Or they use the cash they have to pay the minimum payments, and put all living expenses on the credit cards. At some point, something will usually happen that will cause the plan to come crashing down. So what do you do when you can't pay your bills?
The first thing to do is to stop spending money. You have to break the cycle at some point. Stop spending money and stop using the credit cards. Yes this will be hard; you will have to make some very tough decisions in the beginning. Make do with exactly what you already have for a few days while you sort through the mess.
Second write down every bill that comes into your house each month. Every debt you owe, every utility bill, etc. - write everything down. On one paper write down the basics that need to be covered each month - mortgage/rent, electric, heat, and water. These are absolutely necessary. There might be ways to reduce some of these later, but for now, these have to be paid every month, first. On another piece of paper list all the other bills that are either debt payments or are optional things (cable for instance). Write down the full debt owed, the interest rate and the minimum payment.
Once you have your bills written down, you need to decide on some other amounts. Obviously you need to eat every month. I am not talking steaks or Burger King here; I am talking the basics, the cheap stuff. You are in a desperate situation and you need to make some tough choices. In the beginning try to eat only what you have in the house for awhile while you get caught up on your bills. You do need to plan for food and gasoline purchases though, so decide on a minimum amount that you need for those each month and put them on the first piece of paper.
Now you have to decide the order in which to pay your bills, because if your world has come crashing down, then you probably don't have the money to pay them all. Everything on the first paper gets paid first. Everything on the second paper gets paid last. If you find out that by slashing your budget you can afford to make minimum payments on all of your debt that is great. You then have to decide on the correct order.
There are several ways to do that. You can pick the debt with the largest interest rate and pay it first or the debt with the highest balance and pay it first. I prefer to pay off the smallest debts first though. That might seem odd, but you will gain some traction very quickly this way. By putting extra towards the smallest debt first it will most likely be paid off quickly and you will have money freed up in your budget.
What if you can't make a minimum payment on all of your debts? It is time to talk to the companies. If you have student loans you can see about getting them put into forebearance, which will usually allow you to take some time off from the payments (interest will accrue though). If you have credit card debt I would first call each company and ask for an interest rate reduction. Your best chance at this is before you are actually late on a payment. If you can get your interest rate reduced, then chances are your minimum payment will go down some and you might be able to afford it. If you can't get a lower interest rate and you can't make the payments, then you need to be upfront with them and work out a payment plan. Usually the account will be frozen at this point so that you can't charge anything else.
Some companies will be unwilling to work with you though. If you can't pay all of your bills, credit cards should be the last thing that does get paid because it is unsecured debt. Other types of debt are secured with something like a car and the company can come take it if you don't pay. So if you have to choose, pick an unsecured debt to not pay. I am not advocating that you don't repay your debt though, eventually you will have to pay them back, with interest and fees, but we are talking desperate times and trying to get back on track, so for awhile you might have to stop paying on some debts.
I haven't mentioned cars and car loans yet. These are tricky. Some people really need there car and have to have the loan to pay for it. You have to evaluate your situation. If you make $20,000 a year and have a $500 per month car payment, you need to sell the car ASAP because there is no way you can sustain that payment. If you have three cars, all with payments, sell one. If you have access to good public transportation seriously consider selling a vehicle. Desperate times call for drastic measures and everything needs to come up for reconsideration. You have to make changes and selling a car might be one of them that has to happen.
Once you have a budget in place and a plan for repaying your debt you need to figure out a way to make some extra money so that you can dig yourself out of this hole you find yourself in. Chances are good that you have been overspending. On what? Can you sell any of that now? Is there anything that you haven't even used yet that you could return? I would sell anything extra that you can find. I would try to bring in any extra income you could to get back on your feet.
If you do all of these things, the chances are good that you will be able to get your financial house back in order fairly quickly. Once you are back to being able to pay at least the minimum on all your bills it is time to work through a debt snowball and get everything paid off as quickly as possible. If you can make the hard decisions immediately and make some changes to help you will be able to stop the bad cycle you have found yourself in. You are making some lifestyle changes here and if you can stick with the plan then it won't be long before you will be doing great financially.
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