If you have debts piling up and cannot pay them off, you need to weigh your options. To start this process off you should tally up all your debts. Next you need to really think about how long you expect to have financial problems, will it be long term, or is this just a bump in the road that you can overcome with time and dedication? If you own property you need to figure out if it is covered by exemptions for any possible bankruptcy. lastly you should really research your states wage garnishment laws, as creditors may pursue this option.
The types of debt you have will affect what your options are, as well as what options your creditors have when it comes to you defaulting on your debts. Each type of debt has its own range of collections actions that creditors can pursue. Read on:
Government Debt & Restitution
This is the worst debt to have when it comes to debtor relief. Tax debt that is under 3 years old cannot be included on any bankruptcy. If you owe any government agency, they can attach wage garnishments on you, or even garnish your social security, all without every getting a lawsuit judgement placed. The government can even withhold your tax refunds. This type of debt offers no escape and no relief.
Student Loan Debt
Bankruptcy is never ever an option here. Student loan lenders have the option of pursuing wage garnishment. The only relief you can find is through government programs that help to reduce your monthly payments, and the few rare circumstances that may qualify you for student loan forgiveness. There is also the option to aim for a consolidation loan if you owe on multiple student loans.
This type of debt is any debt that is secured, which includes debts like your mortgage, car loan, and auto title loans. Your creditors have special rights to take this property away should you default, namely the processes of foreclosure or repossession They can go after your car rather quickly, while going after your property can take a bit longer.
This is the easiest debt to get rid of, and the most common form of debt. This debt includes most medical debt, credit card debt, merchant lines of credit, unsecured lines of credit, unsecured personal loans, and other unsecured loans. Creditors must file a lawsuit, seek a judgement, then after a time they can go for drastic collection actions such as wage garnishment or property liens.
Next you should look into your states exemption laws. Each state has laws with exempt assets from creditors. This is especially important if you are considering applying for bankruptcy, as these laws will protect your assets from being seized by the bankruptcy trustee. You must research this so that you know exactly what property, if any is at risk for collection, repossession or sales auction (in some states).
Next you need to learn your states garnishment laws. When can they garnish and what incomes can they touch. Certain forms of income such as SSDI, SSI and veterans benefits cannot be touched if directly deposited into your bank account. Other forms of income can always be sought after by collections, while other income you have may be protected either in whole or in part.
You now know what types of debts you have and what actions creditors may pursue. Now you only need to figure out a course of action to take, lets discuss your options.
This is not advisable unless you are judgement proof, meaning that all of your debt is unsecured, any property you own is exempt under state law and any income you have is immune to garnishment. If any of the above does not hold true you could lose income and/or property.
Many creditors if told you are on the verge of being insolvent or filing for bankruptcy will be willing to discuss terms. Sometimes creditors will be willing to reduce and indeed sometimes even suspend payments until such time as you are back on your feet. Sometimes they will say no on the first time asking, but tend to say yes after you have fallen behind on one or more payments. Needless to say falling behind on payments does hurt your credit score.
You can opt to roll all of your debts into one loan, provided that your credit is still somewhat intact, and you have reacted quickly to your deteriorating finances quickly enough to do so. Many people wait far to long to explore this option, then by the time they desire to take it their credit score is to low to get a loan. Many times you can score one loan with an overall lower interest rate.
This should be the last option to take. Your credit score will tank, and you can not file again for 8 years. There are 2 main bankruptcy options, chapter 7 where all debts are forgiven, and chapter 13 where debts are reduced and restructured. See our articles on this topic for an in depth look at bankruptcy.