Deal with Debt and Creditors

When you feel like you're falling behind and creditors are calling, few things are more stressful in life. We're here to help you, with tips for managing debt and communicating with creditors so you can move ahead.

Deal with Debt and Creditors

Having a car provides many conveniences. You do not have to worry about lugging groceries on the bus or waiting 45 minutes for the train. However, for those experiencing financial problems, having to pay a car loan can make owning a car seem more like a burden than a convenience. If you are behind with payments, or worried you will be soon, assessing your financial situation and actively pursuing your options can help you make the best of a difficult situation.

What happens if you stop making car payments?

When you first fall behind, your lender may call you and/or send you letters in an attempt to collect the delinquent amount. If you continue to miss payments, and do not reach an agreement with your lender, the car will likely be repossessed. If reported, the late payments and repossession can damage your credit score and make it harder to get credit in the future. How long the lender will wait before repossessing the car depends on where you live and the specific policies of your lender. Some states allow cars to be repossessed after one missed payment.

Once a car is repossessed, it is usually sold through an auction. It is common for cars to sell at auctions for a fraction of their resale value. If your car sells for less than your loan balance, you will owe the lender the difference, called the “deficiency balance”. The lender may be willing to set up a payment plan with you for the deficiency balance or try to collect the entire balance at once. However, not all lenders aggressively pursue deficiency balances, and in some circumstances lenders may even forgive them. Having the debt forgiven can increase your tax liability, though, since the IRS considers forgiven debt to be a source of income.

Assess why you are struggling.

Are you facing a temporary hardship, or is the car just not affordable? You will be better able to determine an appropriate course of action if you know why you are struggling. If you are not sure if you can afford to keep your car, listing your income and expenses could be helpful. Are you spending more than you are earning? If so, that is probably one of the reasons why you are struggling with your payments. Can you make any changes to your expenses or income to make the payments more affordable, such as getting a part-time job or eating out less? It is also helpful to consider if you can get by without the car. Is there another car you can drive? Are you able to carpool or take public transportation to work? If you absolutely need the car to get to work or run errands, it may make sense to sacrifice whatever you can to be able to keep the car.

What are your options?

Options that provide temporary assistance include loan extensions and repayment plans. In a loan extension the lender takes the payments you missed or are asking to skip and adds them to the end of the loan. This increases your repayment period but eliminates the need to make extra payments to become current on the loan. If you are interested, you should call your lender, but keep in mind that not all lenders offer loan extensions. In a repayment plan the lender collects a partial extra payment on top of your regular monthly payment until you have repaid the full delinquent amount. Of course, you could also make a double payment, but many people do not have the funds to do that. If you are delinquent, avoid sending in a partial payment without talking to your lender first, since it may be rejected without a formal agreement.

Refinancing is an option that may work for people in a variety of situations. For those that fell behind due to temporary hardship, refinancing provides a way to become current without making extra payments. For those whose car payment is too high, refinancing provides a way to lower the payments if they have already paid down a significant portion of the loan, since it can extend the repayment period. For example, if after two years of paying a $20,000, 4 year loan at 7% you refinanced with another 4 year loan at 7% for the remaining balance ($10,697), your monthly payment would decrease from $478.92 to $256.15, a savings of over $200 a month. The same result can be achieved with a loan modification if your current lender is willing to extend your loan and lower your monthly payment. Having a lower payment can help cash-strapped individuals who want to keep their cars, but because you are borrowing money for a longer period of time, refinancing can increase the total interest paid over the life of the loans. Furthermore, if your credit score is low, it may be hard to get a new loan.

If you do not feel that you can afford to keep the car, it is better to sell it than to let it get repossessed. Selling a car is fairly straightforward if you can get at least enough for it to pay off your loan. However, it is not uncommon for people to be “upside down” – owe more on the loan than what they can sell the car for. What do you do in this situation? One option would be to ask the lender to forgive the difference between the amount that is left on the loan and what you sell the car for. Another option would be to set up a repayment plan for the balance remaining on the loan. Since, in most cases, you can sell the car for more than the lender can, you probably would not have to pay back as much as if you let the car get repossessed. If you are planning to get another car, you may be able to roll over the remaining balance into the new car loan. However, this option will only save you money if you purchase a new car that is much cheaper than the one you have now.

If you cannot sell the car at all, you can see if the lender would be willing to accept the car back. This is called a voluntary repossession. Most lenders report voluntary repossessions on credit reports (which will lower your credit score, just like a regular repossession will), so you may only want to consider it if other options have not worked out or if the lender is willing to give you something in exchange for turning in the car, such as a reduction in the amount you need to repay.

When you are experiencing financial problems, it is easy to feel helpless. You may not be able to control everything that happens in your life, but if you are struggling with your car payments, you have options - you do not need to wait until your car is repossessed. Call your lender. Put a “For Sale” ad in the paper. See if you can refinance your loan. Think about what you want to do, then do it!

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Have a feeling you won't be able to pay your bills? Are already behind on payments? Resist the urge to hide your head in the sand and hope it will all just go away. Unless you take action, the situation will deteriorate, and your available options will be reduced. Here is how to gain control of the situation, prevent problems from escalating, and possibly even reverse damage.

Don't Wait

If you know you won't be able to meet your financial obligations before you actually miss a payment, contact your creditors immediately. You may be eligible for special programs that will keep your accounts in good standing. Waiting until you are behind will not only increase your balance because of hiked up interest rates and fees, but will damage your credit as well.

Be Honest

Never be less than truthful with a creditor. Chances are they've heard every story and excuse. If you are unable to pay a debt, explain why, even if it's because you were "irresponsible".

Stay Calm

Rather than succumbing to tears, threats, or panic, keep your cool. Getting overly emotional can cloud thinking and you could say something you later regret (e.g., "Go ahead and sue me then!").

Be Conservative

Though it can be very tempting to offer more than you can realistically afford in a time frame you probably can't meet, don't do it. If you think you can send a payment in two months, ask for three. If you make a payment early, great, but if you fail to meet your self-imposed deadline, you may not get another chance for a break.

Offer Specific Solutions

Make your offer first. If you leave it up to the creditor to find a solution to debt that's owed, you probably won't like what you hear. You may ask for:

  • A hardship plan (lesser or no payments for a specific period of time)
  • Reduced or eliminated fees and interest
  • Paying interest only on the debt until you can resume making monthly payments
  • A settlement (a lump sum payment that is less than the balance due)


If a creditor makes an offer to settle on a debt, don't hesitate to ask for a further reduction. It doesn't hurt to try.

Communicate with the highest-ranking employee

Ask to speak with a manager or supervisor regarding your account. They usually have more authority to strike a deal or make payment arrangements than customer service representatives.

Keep a journal

Keeping track of people you spoke with and what was said can be very confusing, and information can be conflicting. In a notepad or on a spreadsheet, list names, dates, times of day, and what transpired.

Write letters

Corresponding by mail lets the creditor know you are serious and allows you to say what you want without getting flustered. It also provides proof of communication. Having hard copies of your letters can be a great asset if the circumstances becomes dire and you have to go to court. Letters should:

  • Have your contact information and account number
  • Be addressed to a specific person or department
  • Include a detailed explanation of what led to not being able to pay for the debt
  • Include the specific solution you are seeking
  • Provide documentation (e.g., unemployment or medical papers)

Don't send post-dated checks

Though creditors may ask you to send post-dated checks, don't do it. They can be cashed anytime. And if the checks bounce, your situation will become even worse.

Know what can happen if you can't pay

When communicating with creditors, it is important to know what they can really do if you cannot pay what you owe.

  • If a debt is secured, the collateral (such as a car) may be repossessed
  • If a debt is unsecured (such as a credit card, medical bill, or collection accounts), you may be sued for the amount owed

Know your rights

The Fair Debt Collection Practices Act regulates third party collectors' collection practices, and state law (which often closely mimics the federal law) regulates original creditors collection practices. Become familiar with what creditors are legally able to say and do, so you can stop them if they go beyond their legal parameters.

Maintain contact

Even if you don't hear from your creditors, continue to provide updates with your situation. It puts you in control.

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Many circumstances in life can derail even the best money management plans and leave us with less than what we need to pay the bills. What can you do if you are facing this situation? Increasing income and/or reducing expenses can lessen bill paying difficulties, but making changes often takes time. However, strategic planning can help you minimize damage until you are back on your feet.

Strategic planning involves both determining which bills are most important and paying those first and trying to set up payment agreements for any bills you are struggling to pay. Monthly obligations may include:

Mortgage or rent. Your mortgage or rent should be the first bill that you pay each month. Would you want to lose your house or be evicted because you were paying your credit cards? Probably not. However, if making payments is impossible, let your lender or landlord know – they may be willing to work with you. Is your mortgage or rent affordable long-term? If not, you may want to look for a cheaper place to live. If you owe more on your mortgage than what you can sell your house for, your lender may be willing to accept a short sale. If you have a lease, your landlord may voluntarily release you from it if you explain your hardship or find a suitable replacement tenant.

Car loan. If you have a car loan, making your payments on time is critical. In many states, a car can be repossessed after only one missed payment. Repossessed cars are typically sold at auctions for low amounts, and the lender may come after you for the remaining loan balance. If you cannot make your payments, call your lender. They may be willing to let you to skip a few payments or accept a repayment plan for delinquent payments. If an agreement cannot be worked out and you cannot resume payments, you may want to sell the car, especially if you have a spare one or can take public transportation.

Utilities. Delinquent utility payments can cause your service to be suspended or terminated, but some utilities are more important than others. You may not be able to, or want to, live without electricity or water. However, you could probably live without cable television. If a service is not needed and cannot be paid, you may want to cancel it before it is shut off. If the service is needed, call the utility company and ask about payment arrangements – you may not have to pay the full amount owed right away. You can also see if the company has any assistance programs for people facing economic hardship.

Student loans. Borrowers experiencing financial difficulties can often get a temporary suspension of payments through a forbearance or, less frequently, a deferment. What if you can’t get one? The only immediate consequence of not paying a student loan is usually credit report damage, but if you make no payments for 180 days, you are considered in default, with possible consequences including tax refund interception and wage garnishment. However, if your loans are public, you have a one-time right to get out of default with a “reasonable and affordable” repayment plan.

Credit cards and other unsecured debt. If you miss payments, your credit score will likely drop. If you stop paying long enough, your accounts may be sold to collection agencies, and you could even be sued. Still, the consequences of not paying unsecured debt are less severe than not paying your mortgage or car loan, and most creditors do not take legal action right away. This does not mean that ignoring your creditors it is a good idea, though. If making the required payments is difficult, contact your creditors about hardship programs (short-term arraignments that allow you to make smaller payments). When requesting a hardship program, explain why you are facing hardship, and let them know what changes you will make to be better able to afford payments in the future. If requesting a hardship program over the phone is not effective, try sending a letter.

When there is not enough money to pay for everything, it is easy to panic. Don’t. Instead, focus on what you can do. You may not be able to control everything that happens in your life, but you can choose what bills to pay first and how to deal with creditors.

Money Tips

  1. Avoid borrowing to help pay your bills. It may provide temporary relief, but long term, it just creates one more bill that needs to be paid.
  2. Find non-monetary ways to relieve stress. Instead of shopping, take a long, relaxing bath.
  3. Even if bill paying is your responsibility, don’t hide financial problems from your spouse or children. Collaborate on what can be done to make improvements.
  4. Resist the temptation to not open the bills you cannot pay. Leaving envelopes unopened doesn’t make the bills go away; it just prevents you from knowing important information about your accounts.
  5. Delay two-week Caribbean cruises and other expensive trips if you are struggling to pay your bills. Many people spend a nice chunk of change on vacations because they think they will provide a break from their problems, but they usually create more financial headaches.
  6. Contemplate areas where you can cut spending. Are you currently shelling out $4 a day for gourmet coffee? The free coffee at work can probably also provide the perk up you need.
  7. Don’t forget to save, even if times are tough – they could be tougher in the future. Having savings will help you pay your bills regardless of what happens.
  8. When you have extra cash, why not put it toward your debt? Not only will paying extra help you become debt-free earlier, but you could also save thousands of dollars in interest charges.
  9. If your credit report is damaged due to missed payments, avoid using companies that promise quick fixes to repair it. Credit repair agencies charge for things you can do yourself for free (like disputing credit report inaccuracies) and often use dishonest or illegal tactics.
  10. Monitor your checking account balance, and don’t write a check or use your debit card unless you know you have enough money in your account. If you overdraw or write a check that bounces, you may be charged hefty fees. Most financial institutions let you check your balance online or over the phone.

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Repaying student debt is one of the most daunting financial tasks many of us will ever face. On top of the magnitude of the debt, feeling like you don’t know your options for repayment can add to your frustration. To try to relieve at least a bit of the stress, below is a straightforward guide to the options you have for repaying your student loans.

Types of loans

  • Public (sometimes called federal loans) - The government is either the lender or guarantor of the funds
  • Private - A non-governmental financial institution provides the loans

Major federal student loan programs

  • William D. Ford Federal Direct Loan Program - Offers Stafford and PLUS loans
  • Federal Family Education Loan (FFEL) Program (no longer offered after June 2010) - Offered both Stafford and PLUS loans
  • Federal Perkins Loan Program

When do you need to start paying?

  • Stafford loans - 6 months after graduation
  • Perkins loans - 9 months after graduation
  • PLUS loans - 60 days after funds disbursed or 6 months after graduation if you receive a deferment
  • Private loans - Confirm with your lender

Repayment Plans

For FFEL and Direct loans

  • Standard - Fixed payments for 10 years
  • Graduated - Payments start off lower than increase, 10 years but can be combined with extended
  • Extended - Fixed payments for up to 25 years
  • Income-contingent (Direct only) - Based on income, can be extended, forgiven after 10 or 25 years
  • Income-sensitive (FFEL only) - Based on income, 10 years
  • Income-based - May be able to get lower payment than under other plans, can be extended, forgiven after 10 or 25 years

For Perkins loans - There are no alternative repayment plans for Perkins loans, but your school can extend the repayment period due to extenuating circumstances. 


  • You can combine all, some, or even one loan
  • You do not have to be current on payments to consolidate
  • You cannot add private loans to a federal consolidation loan
  • You can add federal loans to a private consolidation loan but you may lose certain rights afforded to those with federal loans

Loans can be cancelled or reduced if:

  • You become permanently disabled
  • Your school closes or is determined to be falsely certified
  • You volunteer with a designated public service organization, join the National Guard or accept a specific type of teaching position

What to do if you can't pay

Seek a deferment with your lender

  • Temporary suspension of payments
  • Interest suspended on subsidized loans
  • Can be obtained if enrolled in school, disabled, unemployed, or in armed forces

Seek forbearance

  • Temporary suspension of or reduction in payments
  • Interest still accrues
  • Can get if monthly payment high or have unforeseen personal problems
  • Easier to get

Possible consequences of default (over 270 days past due)

  • Tax refund interception
  • Wage garnishment
  • Ineligibility for deferment, alternative repayment plans, grants, and new student loans
  • Credit report damage
  • Collection activity, for which there is no statute of limitations

Getting out of default

  • For federal loans, you have a one-time right to get out of default with a reasonable and affordable repayment plan
    • Loan rehabilitated after 9 on-time payments
    • Default notation removed from credit report
  • You can also consolidate to get out of default
  • Usually student loans cannot be discharged in bankruptcy

For help

  • Federal Student Aid Information Center/Student Aid on the Web 
    Provides information on federal student loans 
    (800) 433.3243
  • Direct Loan Servicing Center 
    Allows borrowers with Direct loans to make payments online and manage their account 
    (800) 848.0979
  • Department of Education’s Default Resolution Group 
    Provides information on defaulted student loans 
    (800) 621.3115
  • Federal Direct Consolidation Loans Information Center 
    Provides information on the Direct consolidation loan program 
    (800) 557.7392

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