What To Do When You Can’t Pay Your Bills
With unemployment nearing 14 million Americans (this is the official number, which does not count people who have given up looking for work) many people are finding themselves in a situation where they are unable to pay their monthly bills. Of the 14 million unemployed, 45% have been unemployed for six months or longer. In Colorado, where I practice bankruptcy law, there are close to 250,000 people unemployed.
If you find yourself unemployed, or underemployed because of job loss in the family, hours being cut or a pay decrease, having a game plan is essential. Not everyone who becomes unemployed ends up filing for bankruptcy, but it is a large contributor to bankruptcy cases. When money gets tight and something has to give, you should be thinking further down the road than just next month. Here are some things to consider when you can’t pay all the bills.
Stop Paying Unsecured Debts First
If you can’t make ends meet, for whatever reason, you should stop paying your unsecured debt first. Unsecured debt means that the debt is not secured by any property, like a home loan or car loan.
Unsecured debt includes credit cards, past medical debt and pay day loans (don’t let the pay day lenders trick you, these loans are easily discharged in bankruptcy and you are not committing a crime by failing to pay the loan back or stopping payment on the un-cashed checks they hold).
Bankruptcy is very effective at wiping out unsecured debts like credit cards and medical bills. Because of this, these bills should be the first thing you leave unpaid because if you do not get back on your feet quickly you can discharge them in bankruptcy.
Of course once you stop paying these bills the debt collectors will start contacting you, but it can take a long time for them to take any action other than annoying phone calls and letters. Eventually, if you are unable to catch up on these bills and they remain unpaid you can be sued for the balance. If you are sued and a judgment enters against you, the creditor can garnish your wages (up to 25% of your take-home pay in Colorado, where I practice bankruptcy law), attach the funds in your bank account and even put a judgment lien on your house.
Therefore, if you stop paying credit card bills and other unsecured debt you need to know that eventually that debt will rear its ugly head. At this point you may need to file bankruptcy to wipe it out forever.
Important Note: If you are paying an unsecured creditor, such as a collection agency, on a stipulation (either to avoid judgment entering or to settle a judgment that has already entered) then you should not stop paying the stipulation creditor without checking with an attorney first. This is because going into default on a stipulation can have big consequences and you need to be prepared. Therefore, so not stop payment on stipulations without making sure you understand the consequences according to the specific stipulation you agreed to comply with.
Don’t Bank Where You Borrow!
A very important thing to understand if you are going to stop paying bills is what we at Wink & Wink call a Rule for Life: Don’t Bank Where You Borrow!
In short, your bank should just be your bank. It should not also be your credit card provider, your auto loan lender or your mortgage lender. This is because banks are allowed to set-off or take money out of your checking or savings account to pay other debt to them, such as car loans, home loans or credit card bills. This means that if you get behind on a credit card bill with Chase bank, and you also bank with Chase bank, Chase has the right to grab money out of your bank accounts to pay the other debt to them that went unpaid.
In many cases, it makes sense to walk away from your current bank when you hit hard financial times. In addition to the bank being able to grab money out of your account to repay other debts you owe them, you may have automatic withdrawals set up from your bank account to pay credit cards or un-cashed checks made out to pay day loan lenders. Finding a new bank (that you don’t owe any money to) is the most effective way to stop your creditors from taking money out of your bank account. It cuts off the automatic debits and prevents outstanding checks from being cashed.
If finding a new bank results in you being charged fees by the old bank, these fees can be included in bankruptcy and wiped out. This is also true for overdrawn lines of credit. Lines of credit at the bank are unsecured debt and can be included in bankruptcy.
So, if you are at the point where you cannot make ends meet and you need to stop paying your unsecured debts, make sure you are in as strong a position as possible by banking where you don’t owe money, and where your creditors don’t already have access to your account.
Special Consideration: Tax Debts and Student Loans
If you are currently paying student loan debts, you want to keep up with those if at all possible. This is because student loan debts are not dischargeable in bankruptcy and you are stuck with those. Default on student loans will cost you additional interest payments and generally increase the amount of debt you will pay over the life of the loan. Additionally, student loans (whether it be the lender or a collection agency) can garnish 15% of your take home pay.
As for the IRS or state taxing authority, some tax debts can be discharged in bankruptcy. Therefore, if you are having trouble keeping up with a payment plan on tax debt, it’s a good idea to have a free consultation with an experienced bankruptcy attorney to determine if you can get rid of those debts in bankruptcy. Additionally, you can pay back certain back taxes over three to five years in Chapter 13 bankruptcy without being liable for further penalties and interest.
Secured Debts: Lots of Things to Consider
If not paying the credit cards and medical bills doesn’t give you enough breathing room, it is time to consider your other bills. Secured debts are loans taken out that are secured by actual property, such as your house or your car. If you must stop paying on secured debt, you need to know the consequences and their timelines.
Vehicles:
If you are considering stopping payments on secured debt, you probably do not want to start with your car. This is because the timeline from the first missed payment to repossession is a short one (the lender can send you a right to cure letter after 10 days and can repossess your vehicle if you do not pay everything due in 20 days – see more information on Colorado auto repossession law)
Since most people need their vehicle to get through day-to-day life, you do not want to stop making your car payments unless you are prepared to have the car taken away. However, if you have a car payment that is too high for your budget and you simply cannot make the payments work you need to know that bankruptcy can help you out of that situation as well.
If your vehicle gets repossessed, it will then be sold by the lender. You will be liable for the difference between what you owed on the loan plus all fees associated with the repossession and what the lender actually gets for the property at the sale. This is called a deficiency. Bankruptcy can wipe out that deficiency completely.
If you are having trouble making payments on a vehicle in which you have equity (meaning you can sell it, pay off the loan and still have money left over) then you should look into selling the car and paying off the loan. If you leave that up to the lender in a repossession it is likely they will not sell the car for as much as you could get for it on the open market (which has pretty much become Craigslist, in my area at least).
Mortgages:
If you have stopped paying your credit cards and medical bills (and have found a new bank where you owe no money) and you are still struggling to make ends meet, it’s time to look at your mortgage(s). Right now, 23 percent of all mortgages in America are underwater. This means that you owe more than the property is worth. Additionally, many homeowners have more than one mortgage. Being underwater with more than one mortgage presents opportunities in bankruptcy.
First off, let me point out that the following advice applies only if you do not have equity in your home. If you cannot pay your bills, but you could sell your home and have money left over, that is a very different analysis. In that situation you must seriously consider selling your home quickly, before the housing market gets worse. This is because if you continue to get behind on your mortgage payments, the property will be subject to a foreclosure and you will likely get nothing.
If you are one of the millions of Americans who have no equity in your home and you are getting behind on all your bills you have options!
Second Mortgage- If you have no equity in your house and have a second mortgage, you must speak with a bankruptcy attorney to determine if you are able to get rid of your second mortgage in Chapter 13 bankruptcy. If your home is worth less than the amount of the first mortgage (you will want to get a good valuation of the property, not an internet ballpark figure like Zillow and a bankruptcy attorney can help you do that) then you can strip off the second mortgage (HELOC, etc.) in Chapter 13. That is like forcing the mortgage lender to give you a loan modification! If you qualify for this relief, you will not have to make another payment on your second mortgage again.
If you qualify for a second mortgage strip off, you can then immediately stop paying the second mortgage. Therefore, if you have a second mortgage and can’t pay your bills, you would want to stop paying the second mortgage FIRST.
If you do stop paying your second mortgage, you may hear from the lender that they plan to foreclosure on the property if you don’t make the payments. If you have no equity in the property this is a BLUFF. That is because the first mortgage will get paid first at foreclosure, leaving nothing left over for the second mortgage/HELOC.
First Mortgage- If you have already stopped paying your second mortgage, or you only have one mortgage, you need to know what will happen if you stop paying your primary mortgage and the help bankruptcy can offer.
Once you stop paying your first mortgage you are looking at foreclosure proceedings. It usually takes about 3-6 months of non-payment before your lender initiates foreclosure proceedings. Once those proceedings begin, you have to be realistic about your options.
If foreclosure proceedings have begun, you usually have arrears on the loan (arrears are the amount you owe in missed payments, late fees, etc.). Often, the lender will accept less than full payment for a time and generally keep taking money from you, even though the amounts are not the full payment owed. If you are simply unable to afford the property anymore, you want to think long and hard before paying any more money towards that mortgage. This is because partial payments are not going to keep you in the home. They are simply a way for the bank to get more money out of you on the way to the foreclosure sale.
If you can’t afford the home (even after looking into bankruptcy as a way to free up money that was going to other bills/second mortgages, etc.) then your best bet is to stop paying ANYTHING to the lender and live there for free during the foreclosure process. In Colorado, the fastest this can occur once the bank starts the process is four months. But in reality, many foreclosure proceedings in Colorado take nine months or longer. Therefore, you can live in the house all that time without paying the mortgage and save your money to put toward a new living situation.
Foreclosure and bankruptcy often go hand-in-hand. This is because the foreclosure often results in a deficiency, just like the repossession deficiency discussed above. If you have a second mortgage, you are certain to have a deficiency after foreclosure. Bankruptcy can wipe out that deficiency, which is why bankruptcy is something to look into sooner rather than later if you can’t pay your mortgage. Additionally, if you file bankruptcy during the “publication period” (in Colorado the lender must publish notice of the foreclosure in a local paper for 5 straight weeks before the sale date) then you can force the lender to restart the entire foreclosure process over, which can buy you an additional 306 months of living in the property without paying.
If you are behind of your first mortgage but still want to keep the home and are able to make payments, then Chapter 13 can be a great safety net. This is because Chapter 13 bankruptcy allows you to cure those arrears over three to five years. Often, once you fall behind on your first mortgage the lender will stop accepting any partial payments. Chapter 13 bankruptcy allows you to force the bank to accept partial payment of arrears through a Chapter 13 repayment plan.
Therefore, if you have had to get behind on your first mortgage because of a period of unemployment or crisis bankruptcy can help you keep your home by forcing the lender to let you pay off the missed payments a little at a time.
BE VERY CAREFUL
Finally, some words of advice and caution. If you cannot pay your bills there are some huge mistakes people make that can complicate the relief bankruptcy offers if you need it in the future.
DO NOT Do the Following Without Talking to an Attorney
- Liquidate your retirement account to pay your creditors! Your retirement accounts are safe from creditors. They are 100% exempt. Therefore, this is the last place you want to take money from to pay bills you can get rid of in bankruptcy.
- Repay friends or family! If you have had to borrow money from friends or family in your time of need, DO NOT pay them back if you may need bankruptcy relief. This is because they can be sued to bring that money back into the bankruptcy to be shared equally by all your creditors. You can pay them back after a bankruptcy, so talk to a bankruptcy attorney before paying back any money to people you know personally.
- Sell property—Selling property before bankruptcy can cause problems (so can giving property away!). You want to talk to a bankruptcy lawyer before you start selling your things to pay the bills.
Conclusion
If you find yourself unemployed or otherwise unable to keep up with your bills you need a game plan. The worst mistake I see people make in my practice as a bankruptcy attorney is waiting too long to look into the options that bankruptcy can give for debt relief. It’s always better to plan ahead and then not need the protection of bankruptcy than to remain in denial about your situation and not look into all your options.