This blog post is excerpted and adapted from one of the free Delta Community Financial Education Center live workshops, Financial First Aid, which was presented last month; these workshops are available to both Credit Union members and the general public. Please visit the Financial Education Center's Events & Seminars page to register for its monthly, no-cost webinars with practical, actionable advice on managing personal finances, including saving and spending suggestions. The work of the Financial Education Center reflects Delta Community’s mission to help both its members and others in the community achieve financial success.
Please consider that the Financial Education Center workshop related to this post covers this topic in much more detail, and we recommend that anyone interested in the subject of fixing their finances look into attending a Financial Education Center presentation.
Why you shouldn’t ignore your bills during tough financial times
Dealing with a financial hardship can be extremely stressful. It is tempting to just ignore bills you cannot pay and hope everything works out, but this is generally not a good idea. The consequences of ignoring bills can include:
- Higher interest rates on credit cards
- Late fee charges
- Credit report damage
- Lowering of your credit score
- Repossession of loan collateral, such a vehicles or homes
- Loss of financial, utility and other services
- Wage garnishment
- Mounting debt
Act fast to fix your finances
The best way to handle a financial crisis is to quickly review and adjust your budget, prioritize your financial obligations, and thoroughly communicate with your creditors. You may not be able to pay all of your bills in full right away, but by taking a proactive approach to your finances, you can minimize the consequences until they can be improved.
Assess all your income from different sources
If your expenses exceed your income, you will not be able to gain control of your financial situation until you make changes to cut down expenses or increase your income. Before you can do any of that, first, you need to know exactly what all of your sources of income are:
- Record all of your sources of income, including realistic expectations of income that you will be receiving soon. Sources can include salary, dividends or interest from investments, royalties, rent from properties owned, or payments from personal loans.
- Think about ways you may be able to increase your income, such as changing jobs, working more hours, getting a second job, or selling assets.
Assess all your financial assets
Next, list your assets, such as savings, checking, investments, retirement accounts, real property and any recent inheritance. Consider what could (and what may need to) be sold to help cover shortfalls in income and to pay off or pay down debt. If you have to sell assets, consider that:
- Liquidating assets is one way to pay for immediate expenses, but be sure to consider the costs before doing this. For example, withdrawing money from a retirement account can result in substantial taxes and penalties on the amount withdrawn. You are also leaving yourself less money for the future when you may be unable to work. But if this action is the only option you have to save your home or pay for your medical insurance, it may need to be considered. It is a good idea to first consult with a Financial Coach at BALANCE™—before doing anything; read more about BALANCE™ and its services below.
- Selling is not necessarily the only way to use the assets you have. Some retirement plans and cash value life insurance policies let you borrow against their value. You do not have to pay penalties or taxes when you borrow against a retirement plan while you are actively employed as long as you do not default on the loan. If you own a home that has equity in it, you may be able to get money to pay your bills from a home equity line or loan or cash-out refinance. However, keep in mind that if you are unable to make the loan payments, you could lose your home.
Determine your expenses, whether they are daily, weekly, monthly, biannual or annual, and consider how to trim them
After determining income and assets, next break down and list all of your expenses, whether they are daily, weekly, monthly or annual expenses. A daily expense could be a cup of coffee you buy every day, weekly expenses could include fares for commuting by bus or train, monthly expenses usually cover utilities, phone service, rent, mortgage or student loans, a biannual expense could be car or home insurance, and an annual expense could include state or federal taxes.
For many people, increasing income is not practical, but almost everyone can reduce their spending in some way. Honestly and seriously assess items and services you purchase and what is necessary, and what can be reduced, eliminated, postponed, or substituted with something cheaper.
List and add up your debt
If you are experiencing a bill-paying crisis, it can be emotionally stressful to think about how much money or how many people you owe, but it is essential that you take an accurate inventory of your debt. Open up all of your bills and, if you need to, call your creditors to verify your current balances. Create a comprehensive list of all your debt, including mortgages, credit card balances, student loans, personal loans, and deferred or installment payment purchases.
Review your overall financial position—income, assets, expenses and debt—to determine where the difficulties lie
After breaking down and listing all of your income, assets, expenses and debt, subtract your expected expenses and debt payments from your expected income for the year. If you have a projected surplus, you’re in good shape. If you have a deficit, look over your budget again and see if there is anything else you can change, such as transitioning to a lower monthly cellphone, television or internet plan, trimming the amount of electricity or water used, buying store brands, cooking at home more often, or buying from thrift and consignment stores. One option to look at closely is taking out a loan to consolidate your different types of debt, so that for your combined debt your monthly interest payments will be lower.
Prioritize essential expenses
Adjusting your budget could take time, and you may not have enough money to pay all of your bills immediately. Unfortunately, you may have to make an unpleasant decision—what bills will go unpaid or not be paid in full?
Communicate quickly, thoroughly and clearly with your creditors
For any bill that you cannot pay in full or feel you will not be able to pay in the future, you should contact the creditor or service provider immediately, first by phone. Have handy copies of bills or summaries of money owed on the account. Some may do nothing in response to a request for help, but many creditors are willing to help consumers facing hardship if it can ensure that they will eventually be paid some, if not all, of what is owed them.
Here are some tips to keep in mind when communicating with creditors:
- Be specific and honest about the reason for your hardship. Companies are going to want to know what is affecting your ability to pay.
- Have a plan for the future and how it may help the creditor. Let them know that you are making changes so that you can resume paying your bills.
- Remain calm and polite. When you are dealing with a financial crisis, being upset is understandable, but becoming distraught with a customer service representative won’t help the situation.
- Don’t make promises you can’t keep. It can be tempting to jump at any monetary or time concessions the creditor is willing to provide, but remember, you may only get one chance at help. If you can only pay $10 a month, say so.
- Keep a detailed record of what is said and what is, or is not, agreed to. After every phone conversation, record the time and date you called, who you spoke with, any actions you said you would take, and any promises the creditor made.
- Be persistent in attempting to get meaningful, measurable assistance from a creditor. If you call on the phone and the customer service representative says he or she cannot do anything, ask to speak to a supervisor. If that is not effective, send a detailed letter, and if you can afford it, send the letter by U.S. Postal Service registered mail.
- Be prepared to provide copies of financial documents such as banking or salary deposit details to creditors. Some creditors may want documentation to substantiate claims of indebtedness or shortfalls in income. Be prepared to email, mail, or fax copies of supporting documents if they are requested by creditors.
Looking for additional assistance? Good financial health starts with good BALANCE™
BALANCE™ is a financial education and counseling organization that offers free services to Delta Community members. Some of its services include credit report reviews, debt management, and information on budgeting, money management and home buying.
Visit the BALANCE™ website to learn about their education and assistance programs. Members can also speak with certified credit and housing counselors to get personalized guidance.
Want to connect with a Financial Coach about your specific situation? Chat online, email, or call 1-888-456-2227 to speak with a Financial Coach today.
Note that the services offered through BALANCE™ are separate and distinct from any business conducted with Delta Community and are not guaranteed by, nor are they obligations of, the Credit Union.
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