Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
Updated – November 28, 2018
When it comes to making good on debt payments, the struggle is real. One in 4 U.S. adults are behind on their bills, and almost 1 in 10 have debts in collections, according to a 2018 survey from the National Foundation for Credit Counseling.We all know we’re supposed to pay our debts, but sometimes life happens. We run into an unexpected hiccup — a stint of unemployment, a medical emergency — and our budget falls apart.
A healthy emergency fund is by far your best protection, offering a safety net during tough financial times. Arielle Minicozzi, a Phoenix-based certified financial planner, tells MagnifyMoney that saving up three to six months worth of expenses is a good target. You won’t get there overnight, but earmarking part of every paycheck does add up over time, which will amount to a cash reserve you can draw on to cover debt payments when in a pinch.
If you’re learning this lesson after the fact, don’t sweat it. As for rebounding and getting back on the right track, you have more options than you might think. Here’s what to do if you’re struggling to keep up with your debt payments.
Depending on the kind of debt you’re carrying, you have various ways of catching up or staying on time with payments.
Your mortgage is a secured type of debt, which means that there’s an asset serving as collateral — in this case, it’s your home. If you fall seriously behind on your mortgage, your lender is within its rights to foreclose on your house. Fortunately, making one late payment isn’t enough to start proceedings, so you do have some wiggle room.
Generally speaking, most mortgages have a 15-day grace period from the due date where you can still make your payment. You could be hit with a late fee, which isn’t the end of the world if you’re stuck between a rock and a hard place. But things get more serious if you reach the 30-day mark, at which point your lender may report your late payment to the credit bureaus.
When you’re 30 days or more late on a mortgage payment, you put your credit score at risk. It could drop anywhere from 50 to 100 points. Things vary from state to state, but formal foreclosure proceedings typically begin after 120 days.
“I’d say your mortgage is one [debt] you really want to prioritize paying, so the important thing is to make sure you don’t wait until you’re delinquent,” Minicozzi said. “As soon as you see that you have a potential issue on your hands — you’ve made a late payment or think you’re about to make a late payment because you’re struggling to pay — you want to call your servicing department right away for your lender.”
Lead with honesty. Minicozzi said a surprising number of lenders are willing to work with borrowers. This may mean reducing or suspending your payments for a brief period or temporarily lowering your interest rate until you get back on your feet. She emphasized that you’ll have the most options if you reach out before you’re way behind on payments.
The Consumer Financial Protection Bureau (CFPB) recommended connecting with a Department of Housing and Urban Development-approved housing counselor. They can provide free expert insights for avoiding foreclosure. Your mortgage servicer may also have mortgage assistance programs in place for preventing foreclosure so that you can resolve the issue without losing your home.
Auto loans are another type of secured debt, which means your car is up for grabs if you default on your payments. But, unlike mortgages, Minicozzi said auto loans aren’t as heavily regulated. Translation: The window between missed payments and surrendering your car to repossession often closes fast.
So how many payments do you have to miss before this happens? Lenders in most states can swoop in and seize your car without warning if you’ve defaulted on your loan (i.e., missed a payment). Again, specific state laws vary, but the lender typically can’t breach the peace when repossessing your car. The CFPB said making threats, using physical force or removing your car from your closed garage without your permission all count as breaching the peace. That said, lenders in many states can use a device to deactivate your car’s ignition system.
If you have good credit, refinancing your auto loan could pull double duty — reducing your interest rate and bringing down your monthly payment to something that gels better with your budget. If that isn’t on the table, and you don’t see your financial situation changing anytime soon, a last-resort option is to return the car to the lender.
This doesn’t mean that your loan is forgiven, though. In most cases, they’ll sell the car and use the proceeds to pay themselves for costs associated with the sale before applying the remainder toward your loan balance. The only snag here is that it typically isn’t enough to cover everything, so any leftover balance will be on you.
“Most [lenders] would rather work with you than go through the hassle of going after you,” Chris Jackson, a Los Angeles-based certified financial planner, told MagnifyMoney.
Check with your lender to see if it has any financial hardship assistance programs that could help. Even if it doesn’t have any formal programs in place, it may still be open to striking a deal with you, whether that be temporarily reducing or suspending your payments for a brief period.
Student loans fall into two main categories: federal loans and private loans. The latter are doled out by private lenders, while federal loans are backed by the government, so they come with unique borrower protections. Grace periods, according to the Department of Education, come standard for federal loans, which gives new grads some time to breathe before they have to start making payments. But private loans are less clear-cut since every lender has its own rules and criteria.
You’re considered delinquent on your account the day after you’ve missed your first payment. If you haven’t made good on your federal loan payment after 90 days, your student loan servicer will report it to the credit bureaus, which can do a number on your credit score. Your payment history makes up 35% of your FICO score.
Your federal loans will default if no payment is received after 270 days — and a lot of repercussions could follow. For example, your wages could potentially be garnished or the total unpaid balance plus interest may suddenly be due immediately.
Private lenders may be more aggressive. They may report your missed payment to the credit bureaus immediately or mark your loan as in default after as little as three months. Besides the account being sent to collections — which dings your credit score and stays on your credit report for up to seven years — you could also be subject to a lawsuit.
The sooner you act, the better. This is where those federal loan protections come into play. If your loan payments are especially high compared to your income, you may be eligible for an income-driven repayment plan, which could significantly reduce your monthly payments. You might also be able to secure a deferment or forbearance, which temporarily stops or reduces your monthly payments for a period.
If you’ve got private loans, all hope isn’t lost. Refinancing your student loans could get you better terms or a lower interest rate — and significantly reduce your monthly payment.
Jackson recommended looking to your employer to see if it offers any student loan repayment programs. Aetna, for example, matches employees’ U.S.-based loan payments up to $2,000 a year.
“These programs allow employers to make a regular contribution to the loan balance, typically $100 a month, while employees continue to make their regular payments,” Jackson said. “Unlike tuition reimbursement benefits, however, which are tax-free below a certain amount, the employer’s loan contributions are considered taxable income.”
What’s more, there are some federal loan forgiveness programs up for grabs, such as Public Service Loan Forgiveness. The Department of Education also recognizes certain situations, such as bankruptcy or permanent disability, where your loan balance can be discharged.
Unsecured debts such as credit cards and personal loans fall into this camp. Credit card bills come with a minimum payment you have to make each month that tends to fluctuate as your balance increases or decreases. But personal loans have a fixed monthly payment that stays the same for the life of the loan.
Falling behind on your payments is no small thing. Remember: Your payment history accounts for over one-third of your credit score. That’s not to say that a single late payment is going to automatically tank your credit, but if you haven’t paid after 30 days, things start getting more serious. At this point, your credit score can go down anywhere from 60 to 110 points.
Why is your credit score so important? In short, it dictates your borrowing power. Whether you’re applying for a mortgage, an auto loan or a credit card, this magic number determines your interest rates (aka how much you’ll be charged to borrow). A low score could prevent you from being approved altogether. Regardless of what you’re financing, the lowest rates and better terms from the lender you select go to those with good to excellent credit.
When you are making payments, the goal of the bank or credit card company is to keep you making those payments. They are very happy receiving the minimum due. By making the payments, you are demonstrating that you are capable and willing to pay. So, the banks are very keen that you keep doing it.
Having said that, you should still try to negotiate with them and see what they can offer. Just give your credit card company a call, and tell them that you are in financial difficulty and will no longer be able to make payments on time. Tell them that you won’t be able to make the payment next month, and you would like to see what forbearance options are available.
Most banks offer two types of forbearance programs:
Once you stop making payments, you will seriously hurt your credit score. In fact, once you start down this path, it will be a few years before you will be able to borrow again, and it will be 7 years before this mess completely disappears from your credit report. But just think about this: if you barely afford to make the minimum payment, it will be at least 30 years before the debt disappears. If you stop paying, it will be 7 years until the debt completely disappears from your credit report.
Once you stop making payments, expect the collections calls, letters, texts and emails to start coming. And they will come with incredible intensity. You should expect to hear from every creditor every day for at least 6 months. They will then sell that debt to a collection agency, which will start to contact you daily as well.
Your wages could be garnished. That means your creditor could sue you, and money could be taken out of your salary automatically to make payments on your behalf. There is a federal limit on how much can be garnished (and this only applies to the unsecured debt that we mentioned, not student loans, alimony and other debt).
At most, 25% of your disposable pay can be garnished. Disposable income is your gross salary minus most of your deductions, including federal income tax, social security, Medicare, state tax, health insurance premiums and any involuntary pension contribution. You can use this calculator to see exactly how much money you could have garnished from your wages.
Most things in life are up for negotiation. If you find yourself struggling to keep up, Minicozzi said it’s always best to contact the lender as soon as possible.
“You’re more likely to catch more flies with honey than vinegar,” she said. “Review your circumstances, reach out, work with them, and make a good-faith effort to make your payments. If they see that you’re trying to do that, they’re much more likely to work with you than if you hide and pretend like nothing bad is happening, which can lead to potential disaster for your credit.”
Beyond that, there are other ways to make your payments more manageable. Jackson recommended looking into balance transfer offers to consolidate credit card debt. This leverages 0% introductory promo periods during which you can hack away at your balances faster. Doing so typically comes with a 0% to 4% transfer fee, but that’s nothing if you’re up against double-digit interest rates.
Another alternative is to take out a lower-interest debt consolidation loan, then use that to pay off your credit card balances. The new loan will come with a fixed monthly payment, interest rate and repayment timeline, so you’ll know exactly what you’re getting from the start.
You can shop for debt consolidation loan offers using a free tool from LendingTree, MagnifyMoney’s parent company, and may help match you with up to five different lenders.
Those who are in over their heads with consumer debt may find relief through nonprofit credit counseling. A credit counselor can help you make sense of your rights and work with creditors on your behalf. In some cases, a debt management plan may be your best option. Credit counselors can also help you create an effective budget to set you up for success going forward.
A typical employer-sponsored preferred provider organization, or PPO, health plan for an average American family of four will cost over $28,000 this year, according to the 2018 Milliman Medical Index. Some health care expenses, such as monthly premiums, can be expected. But an out-of-the-blue medical bill or emergency can be a shock to your finances, especially if you have a high-deductible health plan.
What’s more, some experts estimate that the majority of medical bills contain a minimum of one error that costs patients money. This includes everything from double billing to inaccurate insurance reimbursement.
Be that as it may, unpaid medical bills can wreak havoc on your credit score. Past-due medical debts are often sold to collection agencies, according to Experian, after which they’re reported to the credit bureaus like any other unpaid debt.
The silver lining, according to Jackson, is that medical providers have a reputation for working with patients to resolve billing issues.
“There is almost always room to negotiate your hospital bill, and in some cases you can get it reduced by as much as 90% or even forgiven completely,” he said. “Plus, collection agencies should be more impressed with an offer of a lump sum than with promises to make payments.”
In other words, brush off your negotiation skills and reach out to the provider. Jackson said that nine times out of 10, most are willing to get you on a monthly payment plan, often with 0% interest.
After receiving a medical bill, the CFPB suggests requesting an itemized statement and reviewing it carefully. If you find an error, send a written dispute to the medical provider. From there, you can negotiate to get your bill down even more.
“Don’t be afraid to push that number to see how low you can get the bill, especially if you’re able to pay in cash,” Jackson added.
Those who foresee a big-ticket medical expense on the horizon can also explore a personal loan that’s designed with medical bills in mind. This is an especially attractive option for borrowers with excellent credit as they’ll likely qualify for lower interest rates.
If you’re on the hook for a medical bill you can’t afford, inquire about hospital-specific financial assistance programs. Sometimes referred to as “charity care,” these programs are designed to help low-income patients get the medical services they need, often by reducing or eliminating the financial responsibility.
The American Hospital Association reported that in 2016, community hospitals provided over $38.3 billion in uncompensated care. You can also see if you’re eligible for state-sponsored Medicaid coverage.
No matter what kind of debt you have, being in over your head doesn’t have to be the new normal. Beyond the expert-backed steps mentioned above, getting yourself on track with a solid budget and prioritizing your emergency fund is one of the best ways forward. This can help break the debt cycle and create a safety net to see you through whatever unexpected financial curveballs life throws your way.