Your options when paying the minimum isn't possible
What to do when your income won't cover card payments
By Todd Ossenfort
The Credit Guy
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
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.
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Published: January 25, 2010
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