How to Work with Your Creditors When You Can't Make a Payment

The following is presented for informational purposes only.

When your income suddenly decreases or disappears completely, the question quickly becomes what do you do about all those bills you're supposed to be paying? If you find yourself without the means to pay your bills, it's a good idea to be proactive and communicate with each of your creditors.

It's understandable if you'd rather not talk to your creditors at all (after all, you can't pay them and that's what they're going to want to talk about), but explaining your situation and maintaining an open line of communication can be advantageous. You want them to know that you're unable, not unwilling, to make your require payments. By contacting your creditors before they have to contact you, you may find that you have more options - including potential deferments or other hardship programs. At the very least, you might be able to head off some of the more unpleasant collection activity.

Tips for communicating with your creditors

There's no guarantee that your creditors will be able to help you if you can't pay, but it's always worth the effort. It's a good idea to communicate in writing whenever possible, to help you record what was said, what was offered, and what promises may have been made.

Some more best practices include:

• Maintaining accurate files. Before mailing any letters, make copies to keep for your files. If you negotiate over the phone, keep detailed notes including the representative’s name, title, and phone number. Follow-up any phone conversations in writing. Be sure to save any email correspondence.
• Staying organized. What are you doing to get back on track? Create a plan - this can help you stay on-task and motivated, but it may also help when communicating with your creditors. Revisit the plan regularly to make tweaks and updates as necessary.
• Being prepared for calls. Even if you're proactive, you should still expect some of your creditors to call. Some may have additional questions, some may have collection processes that just can't be turned off. To the best of your ability, be honest and courteous.
• Keeping your end of the bargain. If you are unable to make agreed upon payments, contact your creditors immediately to let them know and renegotiate, if possible.

Utility companies

Each utility company has its own procedure to follow before disconnecting service. The procedure generally includes notification in person, by mail, or by phone. Before shutting off service, the company may offer a budget plan to help you repay any past due amount. Remember, utility companies don't want to discontinue your service. They might even have information about available emergency funds to help you pay past bills.

Be sure to ask for help at the first sign of financial trouble. Once your utilities are disconnected, you may have to pay the past due bill in full or pay a substantial deposit to re-initiate service. You might also have to reapply for the utility and pay installation charges.

Mortgage lenders and landlords

If you don't make your mortgage payments, you home could be foreclosed. Fortunately, there are many alternatives to foreclosure. For example, if you have the amount of money required to bring your loan current, the mortgage company may be able to reinstate your mortgage. You may also contact your mortgage company and work out a repayment plan.

For help, considering speaking with a HUD-certified housing counselor. If your home loan is backed by the Department of Veteran’s Affairs, call your local VA center. You can also check with your local United Way for assistance.

If you're a renter, contact your landlord about your situation immediately. The landlord may accept partial payment for one or two months. You may want to look for less expensive housing, but be realistic and remember to include moving expenses, deposits, and family adjustments as you calculate costs. If it's a private landlord and you or family members are able, you may be able to do some maintenance work in place of part of your rental costs.

If you need additional help, MMI offers free eviction prevention counseling for struggling renters.

Car and other vehicle lenders

If you can't make your car or other vehicle payments, they may be repossessed. Repossession means that the creditor takes the vehicle and then sells it at a public or private auction. If the vehicle is sold for less than the amount still owed on it, as is often the case, you'll be liable for the remainder.

Check with the creditor to see if the loan can be rewritten for lower monthly payments. Ask for an extension, with the extension fee attached to the end of the loan. If you don't need the vehicle, (if it's a second car or a recreational vehicle), ask the creditor if you could sell the vehicle and pay the creditor off with what you receive. You can also see if it's possible to transfer the title and have the new owner assume the payments.

Credit card issuers 

Late fees and over-the-limit charges can quickly add up if you start falling behind on your credit card payments. In addition, nonpayment could lead to your accounts being canceled and the debt may be turned over to a collection agency.

Notifying your creditors of your changed financial situation may not stop all collection activity; however, many creditors are likely to assist by waiving interest, granting extensions, or reducing payments. Some issuers may direct you to connect with a nonprofit credit counseling agency and discuss a potential debt management plan.

Don't be tempted to replace income with credit card cash advances. Available credit should be used extremely cautiously.

Insurance issuers

Do your best to avoid allowing your insurance to lapse. Write your insurers immediately and explain your situation. Ask what payment options are available. Check with your insurance company; there may be a grace period in making payments from 10 to 30 days. Determine your minimum needs for insurance. Cancel duplicate and non-essential policies. For basic essential policies consider these options:

• Car insurance. By law, you may need to retain your liability coverage. You can research the possibility of reducing your premium costs by increasing the deductible on your collision and comprehensive coverage.
• Health insurance. Check to see if the health insurance provided by your former employer can be continued. If coverage is not available or if you can’t afford the premium, find out if you qualify for Medicaid. Also, check into policies that would pay for major hospitalization and find out what community services are available for routine medical concerns.
• Life insurance. Consider changing your policy to something less expensive. Check into the possibility of borrowing money on your policy to pay premiums.

Not being able to pay your bills can be a painful and emotionally draining experience. The most important thing is that you take care of your basic needs first. Once things get back to normal, you can always fix whatever damage may have been caused. Being proactive and upfront with your creditors makes that process a little easier.

If you're struggling to make ends meet because of an unexpected loss of income, we're here to help. We offer free financial counseling 24/7, online and over the phone. Our experts can help review your situation and provide unbiased advice and resources to help you through a difficult situation.