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What if you can't pay your debts?

By Shirley Anderson-Porisch

Extension Educator

Rising interest rates and higher energy costs are primary reasons many people have difficulty making debt payments on time. That creates problems for both creditors and consumers.

What if you can't pay your debts on time? The Federal Trade Commission and financial experts suggest two strategies:

1. Contact your creditors immediately. Anyone who is not making their debt payments on time should contact their creditors immediately to explain the reason. With open, honest communication, a consumer will often find a creditor who is willing to work with them during a difficult time. The creditor may suggest ways, which may include a modified payment plan, to help the consumer.

Consumers should not wait until their accounts have been turned over to a debt collector. At that point, creditors may have decided that more serious alternatives are necessary to collect payments.

However, the federal Fair Debt Collection Practices Act says that debt collectors may not call someone's home before 8 a.m. or after 9 p.m. They may not call at work if the collector knows the employer doesn't approve of the calls. Collectors may not harass, lie, or use unfair practices when they try to collect a debt. They must also honor a written request from a consumer to stop further contact.

Most creditors are willing to work with you if they believe you're acting in good faith and the situation is temporary. Some lenders may reduce or suspend your payments for a short time. Always ask whether additional fees would be assessed for these changes, and calculate the additional cost for long term planning.

2. Develop a budget or spending plan. Taking control of any financial difficulty involves being realistic about income -- how much money comes in -- and expenses -- how much money goes out.

Developing a budget or spending plan is the best way to do that. List household income from all sources. Then list fixed expenses -- those that are the same each month like mortgage payments or rent, car payments and insurance premiums. Next, list the expenses that vary-such as entertainment, recreation and clothing.

Writing down all your expenses, even those that seem insignificant, is a helpful way to track your spending patterns, identify necessary expenses, and prioritize the rest. The goal is to make sure you can make ends meet for basic needs like housing, food, transportation and health care. A budget or spending plan isn't complete until income and expenses match, or there is money left over.

Shirley Anderson-Porisch is a family resource management educator with the University of Minnesota Extension Service.