Your options when paying the minimum isn't possibleWhat to do when your income won't cover card paymentsBy Todd Ossenfort
Dear Credit Guy,
My
husband had his hours cut and we can't make our minimum payments. My credit
card is now over the limit and getting higher every month. I can't even get
close to paying the minimum right now or in the foreseeable future. The company
keeps calling me offering help and even that amount is too high. What can I do?
-- Elizabeth
Dear Elizabeth,
You
have discovered the hard way one of the major drawbacks of living paycheck to
paycheck. Mainly, any disruption in income can have immediate negative affects
on your financial situation.
Your
credit card debt is unsecured debt, so for right now, I want you to put that on
the back burner and focus on your other monthly obligations. Why? I am
concerned that your credit card may not be the only bill you are unable to pay.
If that is true, you will need to prioritize your bills. First, pay your
mortgage or rent and food and medications for you and your family. Next pay
your utilities (electric and gas, water) and medical and car insurance. Last,
pay your car loan, phone and other miscellaneous bills. Perhaps I am just
overly concerned and you are able to pay everything except your credit card,
but if not, this is the order in which the bills are to be paid.
Next,
I'd like you to take a realistic look at how you are spending your reduced
income. If you haven't developed a budget, you need to do so now. Write down
all your expenses for the month, including everything that you purchase with
cash. Once you have a good idea where you are spending your money, you will
need to determine if you need to make any changes and if you can reduce
spending anywhere. For example, you might consider a bare minimum cable package
or no cable at all, the least expensive cell phone plan and cut way, way back
on entertainment expenses such as eating out.
If
you have not previously completed the budgeting process above, you may be able
to change and reduce your spending habits enough so that you will have the
money needed to make the minimum payment on your credit card. However, should
you still be unable to make minimum payments, you do have several choices on
how to move forward.
One,
you or your husband could secure a part-time job to bring in the extra income
needed. Two, you could seek assistance from a qualified, nonprofit credit counseling agency to determine if you have enough income to qualify for a debt management plan (DMP). A DMP may lower your interest rates and monthly payment
to a level that you can afford. You would also benefit from a thorough review
of your finances by an unbiased third party. You can find a credit counselor at the Association of Indepedent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.
Three,
you could do nothing and after 180 days or more, your creditor will likely
charge off the balance and turn the account over for collections. The danger
with this approach is that if you have an aggressive debt collector, the
company may sue you in court for the amount owed. If the collector wins in
court and receives a judgment, your wages could be garnished. In addition, a
charge-off, collection account or judgment would be three large negatives on
your credit report.
Finally,
you could seek legal advice from a bankruptcy attorney. I would suggest that
you explore all your other options before filing for bankruptcy because it is
the most damaging to your credit. Also, you will likely end up having to pay a
portion of the debt in a Chapter 13 repayment plan unless your income is less
than the median amount earned by families in your state. You have some tough decisions
to make, but the sooner you begin, the sooner you will be free of this
situation.
Take
care of your credit!
See related: 8 tips for squeezing a budget even tighter, 8 steps to picking a credit counselor, Ignoring credit card debt can lead to garnished wages
Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.
The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to The Credit Guy.
Published: January 25, 2010
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