Financial Crisis: How to Spread Cash Among Creditors

When faced with a drastic money shortage, many people have trouble making crucial financial decisions. Angry phone calls from creditors, lights going out, and letters from law firms are sure to turn stress levels on high – and can greatly impair one’s ability to think straight. This, however, is the most important time to get it together and prioritize. If you only have so much money to go around and a variety of creditors to satisfy, know the consequences of not paying each type. Take a deep breath, relax, and start deciding who gets what of the cash you have.

Child Support Payments
The repercussions for falling behind on child support payments can be astoundingly harsh. Not only may your children have to do without, collection on arrearage can result in a wage garnishment of 50 percent of your income, public humiliation, revoking professional licenses, and even jail. There is no statute of limitations for child support debt – you owe it forever until it is collected. If you find you can’t make the payments, make sure you contact your lawyer or go through the court system to request a modification. Simply not paying is a guaranteed way of making a bad situation worse.

Forget Texas – don’t mess with the IRS. Not paying your taxes can be a true financial nightmare. Fines and penalties can increase the total debt dramatically, and the IRS can severely garnish your wages, leaving you with very little money to live on. Make sure you file your taxes even if you can’t pay what you owe. Not only will you avoid some fines, you may be able to work out a long-term payment plan, settle for a lesser amount, or arrange for a hardship plan where you pay nothing for a year. These options are only available if you file – so don’t avoid the paperwork.

Student Loans
There was a time when many people simply did not pay their federally guaranteed student loans, resulting in many millions of lost dollars. Today the government has adopted a very strict collection policy. Collection methods include wage garnishments and tax interceptions (tax refunds automatically sent to the loan’s holder) without having to go through the trouble of a lawsuit, and liens (a claim against property that secures payment when the property is sold) and levies (the forced sale of property and taking money from accounts), if they do choose to sue. As with child support arrearage, there is no statute of limitations for student loan debt, and it can rarely be discharged in bankruptcy.

Secured Debts
Whether a home, car, or major appliance, if the debt is secured by what you’ve purchased, not paying it may result in loss of that property. Repossession for a home can happen in as little as a few months to over a year, depending on state law and the type of loan you have. Miss one vehicle payment in some states and it may be repossessed. If you don’t want to lose your property (and the money you put into it), make sure you contact your lender immediately to work out a plan of action.

Unsecured Debts
The consequences for not paying credit card, unsecured loans, and unsecured collection account debts are less severe and immediate than the preceding debts – but they can be harsh as well. To collect on the debt, these creditors must sue you in a court of law first, and then win a judgment. The likelihood of that? It depends on many factors, but make certain you know it can, and often does, happen. And if you are sued, the judgment will remain on your credit report for seven years, but collection of the judgment can go on for much longer. Judgment creditors may use wage garnishment, liens, and levies to collect unpaid balances.

You can often avoid many of the problems associated with not having enough money to make everybody happy by taking an organized and proactive role. After identifying which creditors take the highest priority, pare your expenses down to the bare essentials, and if you can, send each at least a token payment. Stay on top of all correspondence and open every letter. Pick up the phone and communicate with creditors as soon as you know you can’t pay, or have to send less than you owe. Write letters explaining your situation, offer realistic solutions, and include documentation to back it up. Whatever type of debt or debts you have, avoid the urge to run away – creditors always run faster.