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University of Illinois Extension

How to Talk to Your Creditors When You Can't Pay Your Bills

January 17, 2009

Don't wait for your creditors to call you about unpaid bills. Instead contact them to explain your situation, said University of Illinois Extension consumer and family economics educator Lois Smith.

"Rather than begin expensive collection procedures, most creditors would prefer to receive smaller payments on a regular basis," Smith said.

She noted that creditors will be more cooperative if you've paid your bills on time in the past.

To begin, do your homework before calling or writing. "Know who you owe, how much you owe, and how you plan to pay them. Make sure you'll be able to follow through on your agreement and that your repayment plan is acceptable both to you and your creditor," she said.

To help you with this process, read the factsheets on which bills to pay first and establishing a spending plan at U of I Extension's www.toughtimes.illinois.edu.

Once you know how much money you can afford to repay, contact each creditor, explain your family's situation, and ask their assistance in working out a solution. Be prepared to explain:

"If possible, visit local creditors in person—the loan officer at your bank or credit union, the credit manager of local stores, and the budget counselor at the utility company," Smith said.

"Contact out-of-town creditors by phone or letter, writing down the name and title of the person you talked to. Follow the conversation with a letter summarizing the agreement and keep copies of your correspondence as well as any reply," she said.

Smith advises using the sample letter to creditors at www.toughtimes.illinois.edu as an outline when talking to creditors. To find the letter, first click on "Managing Your Finances," then "Talking with Creditors," she said.

"As you negotiate with each of your creditors, don't agree to any plan simply to get off the hook," she said. Here are some alternatives to consider when you are negotiating:

Tell your creditors about any changes that may affect your payment agreement. If you fail to follow the plan, they'll be less willing to work with you in the future and you'll hurt your chances of getting future credit, she said.

"But if you owe a large amount of money, and your creditors won't accept reduced payments, you may have to consider more extreme alternatives, such as filing bankruptcy," she said.

If you miss a payment, eventually your bills may be turned over to a collection agency. The Fair Debt Collections Practices Act prohibits collection agency callers from using abusive language, they can't call you at unusual hours or threaten criminal prosecution, and they can't discuss your financial situation with others, she said.

If you receive a call from a creditor or collection agency:

Creditors can take several kinds of legal action against you. They may file a complaint, initiating a lawsuit, in which case you'll receive a summons. The case may be settled in small claims court, depending how much is owed. If you don't respond or lose the case, the court will issue a judgment against you for the amount you owe plus court costs and attorney fees, she said.

Other actions creditors can take against you include:

"Be proactive to head off these drastic measures by communicating with your creditors at the first sign of a problem," Smith said.

Source: Lois E. Smith, Extension Educator, Consumer and Family Economics, smithle@illinois.edu

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