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How to Pay Off Debt FAQ

Debt can be a very overwhelming experience, leaving debtors frustrated and feeling powerless. But armed with the right information and a strategic approach, consumers can often get out of the red and back on track. This article answer some of the most frequently asked question about how to pay off debt. See Which Debt to Pay Off First and Dealing with Creditors Informally for additional details. 

What do I do when my debt is overwhelming me?

Your creditors ultimately want to get paid, so they may be willing to work with you to make sure you're able to pay off debt. You should contact your creditors directly to find out how to pay off your balance and suggest possible solutions. For instance, you could propose skipping one or two payments and add them to the end of the loan term. Some creditors may even be willing to draft a new loan agreement.

Additionally, a number of nonprofit organizations and credit counseling services can work with you and your creditors to help you pay off debt, including debt negotiation and debt consolidation. However, make sure you are working with a reputable organization (see Avoiding Credit Repair and Credit Counseling Scams).

I don't have enough money to make my car payment. Will my lender repossess my car, or do I have other options?

Instead of avoiding your creditors, contact them straight away and explain your situation. Loan companies want to keep you as a customer as long as they can and are typically willing to modify your loan or even let you skip a payment in exchange for a promise to pay off your debt. But if you don't make arrangements, your lender may repossess your car without notice.

If the loan company has already repossessed your car, you can get your car back by paying off the missed loan payments and the cost of the repossession. However, you may have to pay off the entire loan balance to get your car back. If you are unable to pay, the bank will most likely auction your car and hold you accountable for the difference between the money they receive and the remainder of the loan balance.

If you voluntarily surrender the vehicle, some dealers may waive the fees associated with repossession and, depending on much is still owed, let you walk away from the deal entirely. You also have the option of selling your vehicle yourself, which allows you to get the best price and even pay off debt with the proceeds.

See also How to Get a Repossessed Car Back

If I miss a mortgage payment, when will the bank begin to foreclose?

In most situations, foreclosure notices are sent out if banks do not receive loan payments for four or five months. However, as with most other loans, banks would rather keep you as a customer than sell your home for a loss. Banks often have programs that will allow customers to miss one or two payments, pay only interest for a few months, or spread out missed payments over the rest of the loan. 

Also, there are many free and low-cost foreclosure avoidance counseling services available to consumers. The U.S. Department of Housing and Urban Development (HUD) maintains a listing by state of HUD approved housing counseling services that may be able to help you avoid foreclosure. 

See also 10 Tips to Avoid Foreclosure

My house is in danger of being foreclosed; should I cut my losses and sell my home?

If you know that foreclosure is coming and you cannot stop the process, then you'll most likely be better off selling your home. Generally, if you find someone that is willing to buy your home for at least the amount that you still owe on your mortgage, then you should take the offer. If the offer is for less than the amount of debt that is still owed, your bank has the option of blocking the sale.

"Short sales" are another option where banks may let you sell your home for less than you owe and forgive the remaining balance, but these short sales are rare and you must often prove to the bank why you qualify.

I received a huge utility bill in the mail. Will the utility company make me pay it all at once?

Depending on your circumstances, your utility company may allow you to average your utility bill out over the year. If your bills are higher in some months and lower in others, your utility company may allow you to flatten out your payments so you pay similar amounts each month. Additionally, some utility companies allow those with small incomes to receive reduced rates on electricity, gas, water, and sewage.

However, there are situations when you may have to pay off the entire utility bill. For example, if an unknown leak occurs where water runs continuously, you may be responsible for the large bill that shows up at the end of the month. 

I am unable to pay off debt to a creditor. Can he or she place liens on my property, garnish my wages, seize my assets, or take my tax refund?

In most situations, a creditor has to take you to court and obtain a judgment against you before garnishing your wages. Even if that happens, federal law prohibits the creditor from taking more than 25 percent of your wages, and you can even contest this, arguing that you cannot survive on only 75 percent of your earnings.

Depending on your creditor, however, there are three situations in which your wages can be garnished without a court proceeding in order to pay off debts:

  1.  The IRS can garnish your wages without a court order, but you have a 30 day window in which to challenge the order. 
  2. If you have student loans that are in default, the Department of Education (DOE) can garnish up to 15 percent of your wages and a state agency can also garnish up to 10 of your wages.
  3. If you have failed to pay alimony or child support, up to 50 percent of your wages may be garnished.

A creditor may also want to put a lien on your property or attempt to take money directly from your bank account. Apart from the IRS, most creditors must go through court to take these actions.

Finally, your tax refund cannot be taken unless the Treasury Dept. receives a request from the IRS, DOE, or a child support collection agency.

If I do not pay off debts, am I going to go to jail?

Most likely not. The U.S. did away with debtors' prison by 1850, and there are only a few circumstances where you may be jailed. That said, you may be jailed if:

  • You are tried and convicted of willfully refusing to pay income taxes; or
  • You refuse to comply with a court order, most of the time with respect to child care payments; or
  • You have concealed, or are attempting to conceal, your property or your person in order to avoid paying a creditor that has a judgment against you.

If you have additional questions about how to pay off debt or need legal representation, consider speaking with a Debtor-Creditor Lawyer in your area.

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