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Your Home Environment Resource - University of Nebraska Cooperative Extension in Lancaster County

Household Hints & HELP!

Protect Credit Ratings with Proper Debt Management

submitted by Lorene Bartos, Extension Educator
This article appears in the January 23, 2005 Lincoln Journal Star Newspaper.

Whether a sudden crisis, losing a job or just an income shortfall, many people reach a point where they don't have the resources to pay all their bills. When that happens, knowing how to negotiate with creditors is crucial to surviving the financial pinch. Bad credit can stay on record for seven years, decreasing chances of getting loans, employment or housing.

Before all else, take care of basic needs like food, rent and utilities. If child support is available and income has dropped significantly, consider asking the court to change the support amount.

When facing piles of bills, consider which are the longest overdue, whose services might be needed soonest and who is likely to be patient.

Consider possible ways of managing debt crises. Possible solutions include: spending money only on the bare necessities, using all extra money for debt repayment; cut all living expenses including credit payments and renegotiate the credit payments to free up extra cash for necessities and extra payments on debts; look for more income by having someone take on a part-time job or selling something; use only cash – no credit cards – until current debts are repaid.

To be able to negotiate a repayment plan with creditors, communicate the situation to them early. Portraying cooperation and reliability makes creditors more willing to work out a feasible plan. If bills receive no response, creditors will worry they won't be repaid and often turn the matter over to a collection agency, which is less likely to strike a deal.

Try negotiating with a creditor first through letters, followed by phone conversations and then personal meetings. In writing, it is easier to organize thoughts, keep records, choose effective words and make sure all important points are included. Also, it eliminates having to consider matters on the spur of the moment or face intimidating personalities.

In dealing with creditors, be polite no matter how the creditor is behaving. Some creditors use rude behavior to trap customers into saying something foolish. Always have a specific payment amount ready to tell the creditor. Many would rather have a guaranteed small amount than a promised larger one that never arrives.

Only promise affordable payments. If after negotiation the payment still cannot be made, the creditor will be less likely to cooperate a second time. It is best to arrange monthly payments, which require less paperwork than weekly ones but are still on a regular schedule. A formal contract composed by a lawyer is not needed, just an action plan both parties agree to, but put the action plan in writing and send it directly to the person you negotiated with.

Another option is arranging for payments to be automatically deducted from each paycheck at a regular job.

When creditors are leery of cooperating with a repayment plan, a penalty clause might help make the arrangement more acceptable to them. In this agreement, if the payment is not made by a certain date, a penalty fee is added. This arrangement can be risky, so consider adding terms such as a 10-day grace period before the fee is added or exceptions for emergency situations.

As long as creditors are assured of some sort of repayment, most won't take a debtor to court because of the expense involved. If debtors don't own a home, are unemployed, don't have money in the bank and have possessions of low worth, they can't be forced to pay. Certain laws also limit the amount of property and wages a creditor can take. See a lawyer to determine how specific situations would be treated under the law.

Should debt collectors become abusive or oppressive, lie, threaten or commit other unfair practices, the 1978 Fair Debt Collection Practices Act allows those being harassed to sue collectors for up to $1,000 as well as actual damages, court costs and attorney fees. This law applies to any personal, family or household debt and covers debt collectors who regularly collect debts for others, not the creditors themselves or their lawyers.

Debt consolidation loans may seem convenient, but they often end up costing more than paying off the smaller debts. Instead, Consumer Credit Counseling Services is a nonprofit agency that can help consumers work out repayment plans with most creditors. CCCS can be contacted in Omaha at (402) 345-3110 or Lincoln at (402) 484-7200.

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