The severe drought in Alabama has farmers not only worrying about their crops and livestock, but also their family finances.
When you do not have enough money to cover your family’s basic living expenses and pay all your creditors, you face some difficult financial decisions.
“When family income is reduced, your spending habits must change. The sooner you change, the more likely your financial problems can be lessened,” said Gloria Marks, an Alabama Extension regional agent in Family Resource Management and Workforce Development. “Your family should be part of the decision-making process, since their cooperation is essential to carry out the plans.”
When your bills exceed the money available to pay them, you need to develop a revised payment plan to pay your debts. After you have a plan, you will have to contact the people to whom you owe money – your creditors – and explain your situation. Creditors will usually work with you to adjust your payments because they want their money.
“Your past experiences with creditors are important. If you have consistently paid bills when due, your creditors will be more cooperative than if you were late or did not make regular payments,” added Marks. Creditors are in the business of lending money and/or providing services. They want to keep your business, but they also want to get paid.
Before you talk with your creditors, take a hard look at your situation and make decisions about how much and when you can pay.
First, answer the following questions:
- How much income can you count on each month?
- How much money is needed to cover your family’s essential monthly living expenses?
- How many creditors do you owe and what is the total amount you owe? Get a clear picture of what and how much you owe.
- How long is your present financial situation likely to last?
- What assets (savings or items that could be sold) do you have that could be used to pay off your debt?
- What debts are the most important to repay first?
- What debts could be satisfied by voluntarily surrendering, or giving back, the item?
Another method is to prioritize or list your creditors starting with the ones who will receive the most money. Think about the worst consequences for your family if certain debts were not paid or if less were paid than the amount due.
- What will affect my family’s health and security the most?
- What interest rate are you paying?
- What about your credit record? Nonpayment of debts is recorded on your credit record and can damage your ability to get credit in the future. That is why contacting all of your creditors immediately if you cannot pay your bills is important. If you can pay something on each debt, it is less likely that your financial problems will be reported on your credit record.
- How much do you still owe on the loan? Determine how much you have paid on each loan and how much you owe. If you have only one or two payments to make on a loan, it is probably a good idea to finish paying it, getting that debt out of the way. You may be able to return newer items or sell them to pay off the debt. If you choose to voluntarily surrender the item, you will still be required to pay the difference between the market value of the item and the amount remaining on the loan. Getting out from under some of your debts can reduce the pressure you feel.
- What will you lose if the bills are not paid? You can lose your purchases if the creditor holds the title of the property as collateral or security for the loan: a home mortgage or car loan, for example. Sometimes furniture and large appliance loans are secured loans. If you are not sure which loans are secured, check the credit contract. Unsecured debts may have to take lower priority, although you are obligated to pay them too.
- You are legally obligated to pay all of your creditors. If you cannot pay all your bills, you must decide how much to pay to each creditor. One way is to divide available money and pay each creditor a share of what you owe. This is probably the fairest way, but it does not always work because every creditor must agree to reduce the amount they receive and extend the payment period.Here is a list of some alternatives to consider when negotiating with your creditors:
- Reducing the interest rate
- Reducing the monthly payment
- Refinancing the loan
- Deferring a payment for a short time if you expect your income will increase soon
- Reducing or dropping late charges
- Paying only interest on the loan until you can resume making monthly payments
- Voluntarily surrendering or giving back an item purchased on credit
- Selling the item and using the cash to satisfy, or partially satisfy, the debt (you are still responsible for any remaining balance)
Not all creditors will accept alternatives. However, they are likely to work with your family if you contact them before they contact you. They all want their money and would rather get some money on a regular basis than have to use collection procedures.
“All of these actions are serious and may jeopardize you getting credit in the future. “You reduce the chances of being harassed by creditors or collection agencies if early on you communicate with them and work out solutions for debt repayment,” Marks said.
Pretending you have no money problems will not make the problems go away. Face the situation honestly. Openly discuss spending decisions with your family. It helps everyone realize that changes and sacrifices must be made for your family’s plan to be successful.
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