By Dara Duguay
Summer 2004
You probably have heard the old adage, "What you don't know can't hurt you." Well, it's a fallacy, especially when it comes to paying your bills. Avoiding creditors and ignoring the reality of your financial situation only makes matters worse.
A more accurate adage is, "You can run but you can't hide." The bill collector eventually will find you. Creditors have many legal tactics to compel you to pay. Even if you don't end up paying the full amount owed, you will end up paying in other ways. For instance, if the creditor takes you to court, your credit report is severely harmed. Plus, there are legal costs and the time away from home and work necessary to appear in court.
If your car is repossessed, it likely will be sold at auction. If the sale price is not enough to cover your existing loan, you will receive a deficiency balance notice. This difference becomes your responsibility, and you will end up paying on a car you no longer own. And you still will need a car, right? What will be your odds of securing a low interest rate with a repossession appearing on your credit report? A low credit score means a higher interest rate, and you will pay a lot more in the long run.
If you are struggling to pay your bills, address the problem head-on. Don't apply the ostrich approach - putting your head in the sand.
Robert, a 25-year-old fitness trainer, made such a mistake. He avoided all interaction with his creditors; he didn't answer his phone, open his mail or respond to legal notices. Robert figured that, in time, his creditors would tire of this game and give up. Eventually, the calls and letters stopped. The creditors seemed to give up, just as Robert expected.
But Robert forgot that what we don't know can hurt us. One day, a moving van appeared at his house. Several men produced a legal order to repossess Robert's expensive weight-training machines, treadmills and fitness equipment he needed to train clients at his home. He not only lost his ability to earn a living, he ruined his credit. When Robert attempted to purchase replacement fitness equipment, he learned that the blight on his credit report would remain for seven solid years. He was unable to obtain the equipment on credit.
And it was all so unnecessary.
If Robert had returned the phone calls and responded to the letters, he could have worked with the creditors to make alternative payment arrangements. The creditors might have been willing to lower his monthly payments by extending his loan over a longer period or allowing him to skip a month to help catch up. Unfortunately, Robert's willful lack of response left his creditors no other choice than to repossess the equipment.
The ostrich approach only makes the problem go away temporarily; ultimately it will return with a vengeance. The best course of action always is to call your creditors before they have to call you. In most cases, they will be more willing to work out payment arrangements if you come to them instead of them having to chase you. By running away, you only aggravate the situation by making them mad. It's naïve to believe that your debts magically will disappear and your creditors will absorb your losses without any consequence to you.
Once you have made the wise decision to contact your creditors to discuss your difficulties, you should first do your homework. Prepare a detailed budget listing all your expenses and sources of income. This budget should include your regular fixed monthly bills as well as variable expenses such as meals out, entertainment, and clothing purchases.
Refer to your budget frequently when discussing your financial situation with your creditors. This is important because the creditors will see that you are keenly aware of your expenses. They will be further impressed if you show a voluntary willingness to cut back on non-essential spending. With a detailed picture of your finances, the various options to resolve your dilemma will become more apparent.
Be open to a variety of solutions the creditor may suggest. These may include credit counseling or selling certain assets like a second car to free up funds to pay debts. Unless you have ignored the problem for so long that your only recourse is to file for bankruptcy, you can work out a payment plan that is satisfactory to all sides.
It is not pleasant to tighten your belt, but it is only a short-term challenge. Chapter 7 bankruptcy stays on your credit report for 10 years. That's not exactly a quick fix, is it?
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Dara Duguay is Director of the Office of Financial Education for Citigroup, and the author of several self-help financial books. Her most recent is "Don't Spend Your Raise: And 59 Other Money Rules You Can't Afford to Break." Her books may be found at www.amazon.com or at any major bookstore.