Options for Debt

How to Behave with Your Creditors
If you are going to do something about it, see your creditor and observe the following:

  • Be polite:
    Even if the creditor is rude or offensive, try and maintain a polite and humble attitude. You don’t want to aggravate the situation and if you are calm the creditor will soon see the soundness of your proposal and will listen to what you have to say.

  • Be practical:
    Don’t make a promise of payment that you can’t meet. It is far better to pay $5 a week that you can meet, than $50 a week that you default on. Any arrangement with a creditor is based on trust and good faith.

  • Be clear and certain:
    Never tell the creditor “I’ll pay you what I can afford”. You have to be certain and specific. The creditor needs to have something substantial to hold on to. If the creditor cannot rely on receiving a specific amount, it leaves the decision solely up to you. You have not been faithful up till now, so how can you expect the creditor to accept that you will be faithful from here on. If you pay nothing, the creditor can argue that you have violated your promise. They would rather get something than nothing and generally they would rather be guaranteed a small amount of money that you meet, than a large amount of money that you fail to maintain.

  • Make a budget:
    If you are to convince your creditors of your good faith, you should set out a budget for them to see. The budget will clearly show why they should trust you to pay what is owed. The budget should show that there is sufficient money coming in to meet the payments you have agreed to.

  • Put in writing:
    Once you have agreed on an arrangement, put it in writing so both parties are bound by it. It doesn’t have to be a big legal contract, but simply a letter setting out the points you have agreed on, which will specifically refer to them waiting for payment and to you making an X amount of payment, every week or every month.

  • Legal action:
    Once you have made an arrangement, they are basically stopped from suing you or taking any other legal action to recover their debt. The U.S courts will look on the agreement signed by both of you as a contract. Be careful, however, that you do not breach your part of the bargain, because once that is done the contract can be lost and the creditor will be free to take you to court.

The Option of Debt Consolidation
Many financial companies encourage people to borrow money to consolidate their debts. This means that the loan company pays off the individual bills and you owe them the greater loan. It’s tempting to get rid of smaller debts and pay one big bill each month.

The downside is that arranging consolidation may cost you a lot and because the longer term of the loan could cost more in interest, than the original small debts. Some of the small debts carry no interest (e.g. normal bills for purchases that do not have interest included) and the only bills with interest levied are credit cards and other types of bank loans.

Smaller bills are also unsecured (i.e. the creditors don’t hold any collateral) so if you cannot pay they cannot take your home or assets from you. (They can sue you in court and win their case, but they will have to take other action to recover money owed from any of your assets.)

If you take out a consolidation-type loan it means that your house or other property, on which the loan is secured, is at risk.

Because of these advantages and disadvantages, it’s a good idea to think hard before entering into any consolidation-type arrangement. You should discuss the various options with your financial adviser or with your accountant and lawyer to see where you stand and whether there are any potential problems for you under the law in the USA.