File for Bankruptcy : Chapter 7 or Chapter 13 is Best Option?

How to Respond to Creditors When You Can’t Pay

By : G. Clinton Heyworth

Almost everybody at some time in their life will run short on money. In our credit-challenged times this translates into thinking, “I am short on money and cannot pay my debts.”

What are your options when you are low on money and cannot pay your creditors? You could wait for the creditor to contact you after you have not paid them.

You could ignore the bills, phone calls, and possible visits from your creditors. You could contact your creditor before you are late.

You actually have a lot of options, but at the outset, you should remember that you owe these companies the money you borrowed, and at least one cost of borrowing is paying it back. On the other hand, you have something they want – money. However, they have tools at their disposal to get that money back. If you don’t pay, your creditors may reach far into your lifestyle and specifically your future ability to obtain credit. Creditors can obtain judgments against you in court and reveal your late payment history to the credit reporting agencies. So let’s look at the options.

OPTION 1 – Do nothing (this is a bad idea; a really, really bad idea)

Regardless of your financial condition, completely ignoring the situation is not going to fix anything. It will increase your stress, the stress of the people you owe (which means more stress for you), and ultimately will land you in a worse financial condition with fewer options. Before you completely ignore your debts, consider these three possibilities. 1) Your creditors and their friends will relentlessly call you. 2) If they get no response and no payment, they may report your late payment to all three major credit reporting agencies (Equifax, Experian, Transunion). 3) They may take legal action, such as suing you to get the money you owe them paid directly from your employer; they can also dip into your pocket (wage garnishment!) or foreclose on the collateral (evicting you from your home, taking back the car they sold you, etc).

If you believe in credit fairies, you might be tempted to think your creditors might just go away. Really? Think about it. When was the last time you just decided someone who owed you lots of money could keep it, and we’d all just be one big happy family? This simply just does not happen.

OPTION 2 – Be reactive… a.k.a. you wait for them to call you

This theme varies the approach to Option 1. However, once you are late and the creditors begin calling you, you will talk with them on the phone. This solution puts you at a disadvantage because you are now late on your payments. To them, you are now the bad guy. They gave you money, and you made them track you down. They will charge late fees and hold you in default. At the end of the day this means you will owe them more money. The phone will ring. “You are late.”

OPTION 3 – Be proactive… a.k.a. you call your creditor

If you choose this option, you know you can’t make your payments and so will they. But you have decided to assess your situation and initiate a phone call with your creditor. “Hello, I’m late, but……” This is making the best of a bad situation. Creditors, now more than ever, are prepared for this type of call, prepared to administer “work out” programs, and hopefully prepared to work with you. This option sets you apart from the people they have to track down and may actually place you in a good bargaining position. They may temporarily agree to waive late fees or delay legal processes. Offering to make a nominal payment (less than the amount you were supposed to, but giving them something) can be helpful to show good faith — if you can afford it. Consider who you would treat better: the guy who takes something of yours and never contacts you again, or the guy who says “ I borrowed the lawn mower, I broke it, I’ll buy you a new one, and here is $50 now to show you that I’m sincere.” You don’t like either of those guys too much, but you appreciate the second guy more.

OPTION 4 – File for bankruptcy

If you choose this option, it generates two more choices: Chapter 7 or Chapter 13? What’s the difference? Chapter 7 wipes it all clean…. no debts besides those you reaffirm (essentially that means a judge may allow you enter into a court-approved agreement to pay certain debts, usually a mortgage or car payment). Under Chapter 13, you’ll pay a little bit to each creditor you owe, for quite some time. Obviously consult with a lawyer. You do not get to choose entirely and your fate is not your own on either path. Federal and state law place limits on each. A judge ultimately must approve both and the effect on your credit rating is pretty dramatic.

How each path plays out depends on more variables than I have room to explore at the moment. Carefully consider your choices. Use the resources at your disposal, many of them free, to determine the best choice. Use good common sense though. Some companies who offer to help (debt reduction/consolidation companies) will take your money and leave you with nothing. Research them well and check out free debt reduction services on Credit.com. But most of all….stay positive.

G. Clinton Heyworth – Clint Heyworth is a member of Chambliss, Bahner & Stophel, P.C.’s Consumer Finance Group, focusing his practice on general corporate law, including consumer finance, regulatory compliance, business organizations and planning, commercial transactions and conflicts of laws.