Life Events

Falling behind on bills is stressful, but it is far more common than people admit, and there are usually options. These answers cover the first steps to take and the choices you may have.

What should I do first if I cannot pay all my bills?

Start with a clear picture. List your income, your essential expenses, and every debt with its balance, minimum payment and interest rate. Then prioritize the bills that protect your housing, utilities, transportation, food and insurance ahead of unsecured debts such as credit cards and medical bills.

Should I contact my creditors?

Yes, and sooner is better. Many lenders will offer a hardship plan, a lower temporary payment, a waived fee or a revised due date if you call before the account is seriously delinquent. Ask for any agreement in writing and keep notes of each conversation.

Is debt consolidation a good idea?

It can be, if it lowers your overall interest cost and you stop adding new balances. It can backfire if the new loan has high fees, a longer term that costs more in total, or if the old cards fill up again. Compare the total cost, not just the monthly payment.

What about credit counseling and debt settlement?

Nonprofit credit counseling agencies can review your budget and sometimes arrange a repayment plan with your creditors. Debt settlement companies are different: they often charge substantial fees, may advise you to stop paying while negotiating, and can damage your credit. Research any company carefully, and see the guidance at consumerfinance.gov.

What happens if a debt goes to collections?

A collector must follow federal rules about how it contacts you, and you generally have the right to ask it to validate the debt in writing. Do not ignore letters or court papers. A missed court deadline can lead to a default judgment against you.

When does bankruptcy make sense?

Bankruptcy is a legal process that can eliminate or restructure certain debts, but it has lasting effects on your credit and is not right for every situation. Different chapters work differently, and not every debt qualifies. It is worth speaking with a bankruptcy attorney before deciding.

Are there tax consequences to debt relief?

Sometimes. When a lender forgives or cancels a debt, the amount canceled can count as taxable income, with exceptions such as insolvency or bankruptcy. You may receive a Form 1099-C. See irs.gov for the rules, and talk to us before you accept a settlement so the tax side is not a surprise.

If money is tight, we are glad to help you sort out the numbers and the tax effects of your options. Reach out to our firm to set up a conversation.