Articles > Getting Through Tough Times

Keeping Up with Credit and Debt

You hate to let a temporary financial setback impact your good standing with your creditors and lower your credit score for years to come. If you find that money is tight and you won’t be able to keep up with bills, take action right away.

Not all creditors will accept payment plans, but they’ll be more likely to work with you if you have been a good customer and if you contact them before they contact you. Before you contact each creditor, make sure you’ll be able to pay the monthly amount in your agreement. If you fail to follow the new plan, your creditor will be less likely to work with you again.

Here are some options you could request from your creditor:

  • Reduce your monthly payment amount
  • Reduce or drop charges for late payments
  • Refinance the loan at a lower interest rate
  • Pay interest only on the loan until you can resume making monthly payments
  • Request permission to sell the item and use the cash to repay – or partially repay – the debt
If you have emergency expenses or a sudden drop in income, you may be tempted to ignore bills or credit charges. Here is what may happen if you put off paying bills:

Utilities

  • Utility service may be shut off. Services such as electric, gas, or your cell phone may be turned off if you don’t pay bills. Also, you may not qualify for energy assistance if you owe money to the utility company.
  • A large reconnect charge may be difficult to pay later.
  • Interest and fees may be charged on overdue amounts.

Mortgage

  • Default – If you miss a mortgage payment, you will receive notice from your lender that foreclosure will begin if you do not pay by a certain date.
  • Late fees will be added to the amount you owe.
  • Cosigner will be asked to pay – If a relative or friend cosigned the mortgage, the lender will expect them to make the payments if you do not. Your missed payments could create serious problems for your cosigner as well.
  • Foreclosure – If you continue to not make payments, the lender will ask the courts to auction your home so the lender can regain the money owed. If this happens, you could lose your home, all of your money invested in it, and still owe more money to your lender. You may want to consider selling your house before court action begins.

Other Creditors

  • Bills will probably be turned over to an independent collection agency. At that point, you will no longer be able to negotiate with the person or company you owe money to. Collection agencies can be aggressive, but you do have certain rights. Collection agencies can’t use abusive language or threaten you with violence. They can’t call you at unusual hours or threaten criminal prosecution. And they can’t discuss your financial situation with others.
  • If you miss a payment, you will receive a letter reminding you that you missed a payment and asking you to pay promptly. After that, you may receive a more direct letter or get a phone call demanding payment.
  • Creditors can take several kinds of legal action against you. These actions are often written into the sales contract you signed. If you fail to make payments, you will receive letters from a creditor’s attorney warning you of the action the creditor plans to take.

These actions may include:

  • Acceleration – the entire debt is payable at once if you miss a payment. The courts can force you to pay by seizing your property and selling it.
  • Repossession – the creditor can seize the item you bought or the property you used as collateral. If the sale of the property brings less than the amount you owe, you still must pay the difference.
  • Wage garnishment – a court order or judgment that requires your employer to withhold part of your wages and pay your creditor. The creditor can also garnish your checking or savings account if you have more than $1000 in your account.

Government Debts

  • Debts like property taxes or child support are handled differently than a loan or credit card payment. See Deciding Which Debts to Pay Firstfor more on these debts.

What might help your score?

  • Pay all bills on time
    Tip: Pay attention to due dates and due times

    • A recent 30 days late payment can lower your score more than a paid judgment from 6 years ago
  • If you carry a credit card balance, pay more than the minimum every month. Paying only the minimum can lower your score.
    Tip: Schedule automatic monthly payments if that helps you pay on time.
  • Pay off debt instead of moving it around to different credit cards or lenders.
    Tip: If you pay off a credit card, don’t close the account if it is an account you have had for a while. If you only recently opened it, closing the account may not have much effect.

    • Don’t use more than half of your available credit limit on credit cards and other revolving loans – even if you pay it off every month.
      Tip: Pay attention to credit card limits – card companies can lower your credit limit triggering over the limit fees.
  • Build Credit
    • If you’re young or don’t have a very long credit history, don’t open a lot of new accounts too quickly. That can lower your average account age and your credit score.
    • Ask a family member with good credit if you could be an authorized user on their credit card – if their creditor reports authorized user data to the credit bureaus. You could also ask to be added as a joint account holder. Note there are risks with attaching your credit report to another person.
      Tip: Secured credit cards can help build up a credit history but only if the creditor reports to a Credit Reporting Bureau.
    • The better your financial track record, the better you can weather the occasional late payment without greatly impacting your score.
  • Shop around for credit
    • You can make multiple applications for a home or car loan within a 30-day period and creditors won’t view it as a negative credit
      Tip: Think twice about store offers to open a new credit card to receive an instant discount on your purchase. The new account could lower your credit score and cost you more than you will have saved with a 10% discount on your purchase. Plus you should take time to review the details of the offer-hard to do in the checkout line.
    • When you apply for new credit, a “hard inquiry” shows up on your credit report and can affect your credit score for 12 months. Too many hard inquiries can send the message to creditors that you are desperate for new credit.
    • Tip: “Soft inquiries” don’t affect your score so don’t worry about ordering your free annual credit reports or a free report when you’re turned down for credit.
  • It’s good to have at least one major credit card in addition to retail store credit cards.
    Tip: BUT, don’t open new accounts just to have a better credit mix. That could lower your score more in the short term.
  • “Payday” and title loans may not report to Credit Reporting Bureaus unless you miss a payment. Even if the lenders do report regular payments to the Bureaus – be careful using these higher cost forms of debt since other lenders may view them negatively.

For your free annual credit report, visit the Annual Credit Report website.

When you are between jobs, the paychecks may stop coming, but the bills don’t.  You’re legally obligated to pay all debt, but when you don’t have enough money to cover your monthly expenses and pay your creditors the minimum amount due, you face some tough decisions.  There is no magic list of the order in which debts should be paid since everyone’s situation is different.

Here are some general rules about how to set priorities:

  1. First, pay housing-related bills. Keep up rent or mortgage payments if at all possible.  Failure to pay these debts can lead to loss of your home.
  2. Pay basic living expenses next. This includes groceries and medical insurance if you can afford the premiums.  Your reduced income may qualify you for FoodShare food assistance or BadgerCare medical assistance.  Check out access.wisconsin.gov or contact your county human services office to see if you qualify.
  3. Pay the minimum required to keep essential utility service. Full and immediate payment of the entire amount of the bill may not be required, but you should make the minimum payment necessary to avoid disconnection if at all possible.
  4. Pay car loans or leases next if you need to keep your car. If a car is needed to get to work, you will usually make the car payment the next priority after housing, food, and utilities.  Your creditor can repossess your car without going through the courts first.  If you keep the car, stay current on insurance payments as well to avoid additional fees, legal problems, or an overwhelming expense from an accident.
  5. Make tax debts a high priority. You must pay any income taxes owed that are not automatically deducted from your wages and any property taxes if they are not included in your monthly mortgage payment.  You must file your federal income tax return, even if you cannot afford to pay any balance due.  The government has many collection rights that other creditors do not have.  Also pay child support; these debts are court-required and will not go away.  Nonpayment can result in very serious problems, including prison for nonpayment.
  6. Make student loans a medium priority. In general, pay them ahead of low priority debts but after top priority debts.  Since most student loans are backed by the government they are subject to special collection remedies, such as wage garnishments, seizure of tax refunds, and denial of new student loans and grants.
  7. Make loans without collateral a low priority. These include credit card debts, doctor or hospital bills, other debts to professionals and similar obligations.  Since you have not pledged collateral for these loans, there is rarely anything these creditors can do to hurt you in the short term.
  8. Make loans with only household goods as collateral a low priority. Creditors rarely seize the goods due to their low market value and the difficulty in retrieval without involving the courts.  If the creditors do start actions to repossess household items, you will be notified by letter.
  9. Treat cosigned debts like any others. For example, if you put up your home or the car as collateral, that is a high-priority debt for you if other cosigners are not keeping the debt current.  If you have put up no collateral, make the debts a low priority.  If others have cosigned for you, you should let them know about your financial problems so that they can decide what to do about the debt.
  10. Don’t pay when you have a good legal reason to not pay. Examples include defective merchandise or the creditor is asking for money that it is not entitled to.  If you believe you have a legal defense, contact a lawyer.
  11. Don’t move up a debt’s priority based on threats to ruin your credit report. In most cases, the creditor has already reported the delinquency to a credit bureau.
  12. Don’t move up a debt’s priority because of debt collection efforts or threat of a lawsuit. Be polite to a collector, but make your own choices about which debts to pay based on what’s best for you.  Many threats are not carried out, and the procedure itself is long and complicated for the creditors.  On the other hand, nonpayment of rent, mortgage, and car debts may result in immediate loss of your home or car.
  13. Do move up court judgments in priority if the creditor has already sued. After a court judgment, that debt should move up in priority because the creditor can enforce that judgment by asking the court to seize your property, wages, and bank accounts.
  14. Be cautious about consolidating debts or refinancing your home. Depending on your situation, this may or may not be the right option for you.  It can be expensive and give creditors more opportunities to seize your important assets.  A short-term fix can lead to long-term problems.

Income Taxes: If you cannot pay the total amount due, contact the Wisconsin Department of Revenue (DOR) and the IRS right away. Ask for information on repayment plans and find out whether your reduced income makes you eligible for tax credits. Contact the Wisconsin DOR at (608) 266-7879 or via the website. There’s a $20 fee to make an installment agreement. Contact the IRS at (800) 829-1040 and ask to be transferred to “advanced accounts.”

Property Taxes: Contact your county treasurer and explain your situation right away if you’re not able to pay property taxes.

Child Support Orders: If your income has dropped sharply, contact your family court to find out about lowering your support order as soon as possible. This cannot be done retroactively.

Student Loans: If you are having trouble making your federal student loan payments, contact your loan servicer immediately. You may be able to have payments deferred – or postponed – during periods of unemployment or financial hardship. But you cannot qualify for a deferment once your student loan is in default.

In this uncertain economic environment, record numbers of families are falling behind on consumer debt. The good news is that most will find a positive solution in time. Key to weathering the storm is to act as quickly as possible, and never ignore or put off the problem.

“It’s stressful to be unable to pay your bills on time and even more stressful to get a letter or phone call from a debt collector,” says J. Michael Collins, University of Wisconsin-Extension family and consumer economics specialist and assistant professor of consumer finance at the UW-Madison School of Human Ecology. “The key is to take action and have a plan-and stick to it.”

The first step is to talk to your creditors before you fall behind on payments. Call or write and explain any circumstances, such as a job loss or health problem. Be clear and direct that you are in a temporary situation and you have a plan to recover within six or 12 months. Resist the temptation to layer on too much information-just focus on the primary problem you are having.

“Before you call, create an overall budget for your family,” says Collins. “Then list every bill, when it is due and how much you owe. Include any late fees or other charges and decide what bills you are going to be able to pay and when you will pay them. Your creditors want to know you have a plan.”

In general. creditors will be more responsive when you let them know about your situation before a severe problem arises and if you have a strategy in place. Most will agree to reduce payments for a period of time, waive fees, or even refinance payments until your situation is resolved.

Plan on making some minimum level of payments no matter what-never just stop paying altogether. But be sure your creditors know your plan. Making partial payments may result in fees and still result in your account being turned over to a collection agency unless the creditor understands your situation.

Although most contact with creditors is by telephone, it is a good idea to keep good notes of the date, time and who you talked to in a log. Also follow up with creditors in writing in case you need evidence of your actions later. For both telephone and mailed correspondence, make sure to include your account number. You might plan to call back every month to make sure your account is not being turned over to a collector and to show the creditor you are sticking to your plan.

“Whatever you do, don’t stick your head in the sand,” says Collins. “Too often people are stressed and anxious and don’t know where to turn. They stop opening mail and start to screen their calls. Even if the creditor had a solution, the borrower would never know about it out. You have to stay on top of it,” he says. “It is important to do your best to pay something on your bill each month,” he adds.

If your accounts do go to a bill collector, you still can work out a solution. Many collectors are extremely persistent and even intimidating. They use automated dialing systems and will aggressively seek contact.

Remember that the federal Fair Debt Collection Practices Act, or FDCPA, prohibits debt collectors from engaging in abusive behavior. This includes calling you at an unreasonable time (before 8 a.m. or after 9 p.m.). The person calling must identify themselves as a bill collector and may not use abusive language or threaten you physically. Most are sitting in call centers and are not trained legal professionals; they may not claim to be legal experts if they are not attorneys or paralegals. Creditors may contact your spouse or your parents (if you are a minor) to try and contact you.

You have the right to tell a collection agency employee to stop contacting you by sending a “cease all communications” letter. You may do so even if the collector is not breaking the law, but generally this is not a good idea .

To file an official complaint with the Federal Trade Commission (FTC), the federal agency that oversees collection agencies, mail a letter to FTC Complaints, 6th and Pennsylvania Ave. NW, Washington, DC 20580, or file one online.

The FTC may take steps to sanction the creditor if your complaint is part of pattern of abuse. You can also contact the Wisconsin Department of Agriculture, Trade & Consumer Protection, PO Box 8911, Madison, WI 53708-8911 or visit the website.

Be sure and send a copy of complaints to the creditor; in some cases the creditor may offer to cancel the debt or a resolution rather than have the complaint acted upon.

If your financial situation will be a problem for more than a year, you may want to explore planning to file for bankruptcy. Even as you explore bankruptcy, do not ignore debt collectors. Fees and charges will mount, and your credit record will worsen. Some people can benefit from working with an attorney or a nonprofit credit counselor. Visit the Debt Advice website for a list of National Foundation for Consumer Credit agencies.

If you have wages or income and have not made acceptable arrangements, your income may be garnished. That means money may be deducted automatically from your pay to pay off a debt. A garnishment can only be done by order of a court. You have a right to a hearing and can avoid garnishment if you can show the judge you have a plan in place. If you are sued or summoned to court for a garnishment, get an attorney. Contact local bar association for a referral https://www.wisbar.org/forPublic/INeedaLawyer/Pages/i-need-a-lawyer.aspx

Additional Resources

This page is optimized for printing
University of Wisconsin-Madison      |        Explore Extension: Agriculture Community Development Families & Finances Health Natural Resources Youth