Take Charge in Changing Times
Dealing with Creditors
For a host of reasons-sickness, unemployment, personal problems-many people experience debt problems. When
the economy takes a downturn, an even larger number of people encounter hard times. Dealing with financial
trouble can cause less distress if you know your options, Reduce your anxiety by taking charge now. Here are
some practical, step-by-step strategies to use when bills cannot be paid.
What to Do First
Some tough decisions will be necessary. Talk with your family about these decisions. Cooperation of all family
members is essential to carry out a plan of action. Follow these steps:
Step 1: List family income. What is your current income? Do you expect it to change?
Step 2: List assets-all that you own. It may be possible to sell some assets in order to pay bills. Do you own
recreation equipment that is rarely used? Could you get along without a second car?
Step 3: List debts. Record the creditor's name, total balance due, interest rate, and payment schedule. Are you
behind in payments? How much?
Step 4: Make a spending plan. See where your money goes. Put credit cards in a safe place and avoid using
them for awhile. Cut out frills-, postpone some spending. take advantage of community services. Dust off your
do-it yourself skills. For help in setting up a spending plan, refer to Money Mechanics: Spending Plans, Pm--934c
available at your county extension office. Realistic estimates of basic living expenses and the amount available to
pay debts are essential.
Contact all creditors, including professionals such as a dentist or physician. Explain the exact facts-that a reduction
in family income due to unemployment or divorce, for example, makes it impossible to keep up your complete
payment. Be frank about future income prospects. You and your creditor can work together to figure out an
acceptable plan. Put it in writing. Do not make promises you cannot keep. Remember, if reduced income
continues for longer than you anticipated, renegotiation of payments will be necessary.
It you contact creditors by telephone, record the name and title of the person with whom you talk. This
information may be helpful at a later time. If creditors are contacted in writing, keep copies of all correspondence,
including the reply.
Deciding Which Debts to Pay You are obligated to pay all creditors. Not paying debts will affect your credit
record and may involve court action, Probably the fairest approach would be to prorate your available money to all
creditors. In doing this, each creditor would be paid a fair share. This method does not always work, since it
requires the cooperation of all creditors. Procedures for dealing with debtors who cannot meet payments vary
Establishing priorities is another way determine which creditor should be paid first. Ask yourself these questions. -
- What will affect my family's health and security the most? Usually the house,. utilities, food, transportation,
and insurance coverage take preference, Pay these creditors first or contact them immediately to make provisions
for smaller monthly payments. (Note: Iowar. law prohibits wintertime (November I-. April 1) utility
disconnections of a resident who is eligible for either- low income home energy assistance or weatherization
assistance, To avoid disconnection of electric or natural gas service under the wintertime moratorium, customers
must (1) apply to their local Community Action Program (CAP) agency prior to a scheduled disconnection; (2)
show the assistance application form to the utility; and (3) show the assistance approval form to the utility
- Is your debt due to secured or unsecured credit? Secured credit is backed by collateral, usually a title to
property. In the event of failure to pay, the lender can take possession of property. Home mortgages, car loans.
and sometimes furniture and large appliance loans are secured. Unsecured debts, backed only by the borrower's
signed guarantee to pay, may have to take a lower priority for payment.
- How much equity do you have in the loan? Equity is the amount of principal paid on the debt. You may have
loans on a television and a refrigerator. The refrigerator is essential, but if only two payments are left to buy the
television, you may want to make those first. Consider selling or returning items purchased just before your
income dropped. In the case of voluntary repossession, you must pay the difference between the market value of
the merchandise and the loan balance. Such action may be reported in your credit record, but has a more positive
status than repossession.
- What is the interest rate you are paying? Compare the interest rates charged on your debts. Pay off the
outstanding balance of loans with higher rates first. This allows you to reduce the amount of interest paid.
- Is a consolidation loan a good idea? Personal finance companies want you to think so, but generally a
consolidation loan charges high rates of interest, often 25 percent or more. A new loan also adds new credit costs.
A single loan does make payment easier, but this is a small benefit for the additional costs involved.
- What about your credit record? Nonpayment of bills is recorded on your credit record; late or partial
payments may not be. That is why it is important to contact all of your creditors immediately if you cannot pay
If you do not contact creditors and make no payments, creditors may hire a collection agency. Federal regulations
limit the practices of these agencies when collecting a bill. Collection agencies may only contact you between 8
a.m. and 9 p.m. They cannot discuss your financial situation with others (neighbors, employers), but they can
contact others in order to locate you. You have the right to tell the collector in writing not to contact you and the
collector must honor your written request.
If, after talking with your creditors, you feel you can no longer handle your financial situation, seek credit advice.
Your county extension office can refer you to financial counselors.
As a last resort in severe financial situations, you may want to consider filing bankruptcy. Seek legal counsel
before taking this step.
Adapted by Cynthia Needles Fletcher, extension specialist, family environment (consumer & management), from Credit Counselinq Centers,
Inc. Education Advisory Committee, I)ealing With Creditors During Times of Financial Emergency, 1981.
Cooperative Extension Service, Iowa State University of Science and Technology and the United States Department of Agriculture
cooperating. Robert M. Anderson, Ji., director, Ames, Iowa. Distributed in furtherance of the Acts of Congress of May 8 and June