When you can't pay all that you owe there is a right and a wrong way to go about it.

In hard economic times, many people have trouble paying their debts. When you can’t pay your debts this will add extra stress on top of your previously existing ones. You may wonder what the best way to go about life is when you’re unable to make payments on your debt. As in any other financial situation there is a good way and a bad way to go about being broke.

Lifestyle Changes

When you can’t pay your outstanding debts you should begin by reducing your monthly expenses. Take a hard look at your finances. Look for places where you can save money. This may mean moving to a less-expensive apartment, going out to eat less or forgoing things like cable television.

Talk to Your Creditors

Be proactive in your communication with your creditors. Explain your financial situation and ask for their suggestions on how to pay back your debts. Remember that your creditors are businesses. This means that it is in their best interests to help you get your financial game back together.

Debt Management Services

You have likely seen advertisements for debt management services on television. These are a mixed bag. Many times they are merely unofficial wings of credit card companies. If you do decide to seek the help of a debt management service you should thoroughly research the institution you are looking at. On the up side, your creditors may be willing to reduce or eliminate interest rates.

Consolidation Loan

A bank loan that consolidates your existing debt is one way of dealing with your debts. One advantage of this is that the interest rate on the bank loan may be significantly lower than your credit card rates. This is especially true if you are currently in default. Taking all of your credit cards, putting them in a single loan and paying off that single loan may be more manageable. A downside of this is that you may need to use your home as collateral for the loan.

The Bankruptcy and Insolvency Act

You can apply for a consolidation order under the Bankruptcy and Insolvency Act. You must have a regular surplus income capable of making significant payments on your debt. The amount of your payments is based upon what level of payments you can make each month. Only half of your creditors need to accept your proposal for it to be binding. Once you have paid off the debt even creditors who voted against it are bound by the agreement.

Declare Bankruptcy

Personal bankruptcy is a last resort. You should only pursue this option if you have no other way to pay back your debts. Your credit will be temporarily ruined, however you will be able to get out from underneath your debts. Of course, if your financial situation is dire, you may also want to consider the last option.

Do Nothing

The phrase “you can’t get blood from a stone” may apply to your situation. If you literally have no money or no assets, there isn’t anything that your creditors can take from you. If the debt is old enough, your creditors will not have a legal leg to stand on when attempting to collect your debt. If your debts are small and you have no realistic means to repay them, you may be safe in doing nothing.

The Stress of Insolvency

When you can’t pay your debts this is known as “insolvency.” It is a stressful situation for any person to be in. However, there are options, as in any situation. Proceed from the easiest to the hardest, remembering that this time will pass like any other. Remaining calm is the first step toward remaining in control of the situation. Only when you are in control can you correctly deal with it.