Sometimes debt comes on suddenly, on the heels of a major loss or traumatic event — the death or disability of a loved one, a medical emergency, a job loss, a disaster, or any other of the nasty surprises that life can bring. If all of your expenses remain the same, and you lose part of your income, you can accumulate debt quicker than you anticipated.
In a few months, we’ll discuss some of these difficult situations in detail, and talk about how you can handle your finances in their wake. But for now, here are a few things you can do if you’re experiencing severe financial hardship.
Talk to your lenders. Explain your situation to your lenders. Tell them what happened, and show them how your finances have been impacted. You might be able to get a temporary reprieve, in the form of reduced payments, while you get back on your feet. The sooner you contact your financial institution, the better. Try to negotiate lower payments now, before you rack up late fees and hits to your credit score.
Hard numbers will help you make your case. Before you go to your lender, put together your budget. Come up with a proposed amount that you can pay, and outline all of your other needs for daily living. Also plan for your recovery: you can’t pay a reduced amount forever, and you’ll be in a better position to ask for a reduction if you set a specific time frame. Show that you intend to return to your full required payment as soon as you can, and you’ll have better luck in your talks.
Once you make an agreement, ask for a record for your files. Make sure that record lists the start and stop date of your reduced payments, as well as the agreed-upon amount.
Talk to all of your lenders. It doesn’t hurt to ask, especially if you have a history of paying responsibly.
Check if you qualify for forbearance or deferments. Some of your installment loans may grant you a temporary forbearance or deferment on your loans, depending on your level of economic hardship. You can temporarily suspend payments while you recover. Just remember, in most cases, your interest will continue to accumulate. If you’re having trouble paying your bills, a forbearance will be better for your credit score than a late payment, so look into it now.
Restrain your spending. It’s now more important than ever that you cut your budget down to the bare basics. Don’t wait to look at your budget — the longer you do, the more money you’ll lose. Study your basic needs, and determine if you can cut basic needs, and determine if you can cut spending to your new income, so that you limit the amount of debt you incur, and reduce any long-term damage to your finances.
Resist your credit cards. You have them for an emergency and the emergency is here. But if you’ve lost part of your income, it’ll be even more difficult to pay back your cards, and you’ll risk drops in your credit score if you can’t make your minimum payments. If you must use your cards, be sure that they’re only used for your essential needs.
Michael Camacho is the president and chief executive officer of Personal Finance Center. He has more than 18 years experience in retail banking and with financial institutions in Guam and Hawaii.