Money Matters: Dealing with Creditors

By: the Knoxville Bar Association

Sometimes, the hardest part about dealing with creditors is just figuring out what your debts are. You will need to find some old paperwork and might have to make a few phone calls. But when you have this information, you will be able to move forward to protect your credit and reduce what you owe.

STEP ONE: List the debts. Make a list of all of the debts you have and whether they are "secured" or "unsecured."

" Secured Debts" give the creditor the right to take certain property if the debt is not paid. For example, your house payment is probably secured by the house, and your car payment is probably secured by the car. Sometimes, people get a "second mortgage" on their home to pay off credit card debts or other bills. Even though the money was not used to buy the house, the house is still "collateral" for the debt. This makes it a "secured" loan. " Unsecured Debts" are those that have no collateral. Typically, credit card debts and medical bills are "unsecured."

STEP TWO: Identify the debtors. Who signed the credit agreement?

Individual Debts. If you signed alone, you are responsible for repaying the debt by yourself.

Joint Debts. If you signed with another person, both of you are equally obligated to the creditor.

Co-Signers. If you had a "co-signer," that person guaranteed that you would pay. If you do not pay, the creditor may demand payment from the co-signer--but the creditor will probably try to collect the money from you first. Likewise, if you co-signed for someone else’s debt, the creditor may demand that you pay it if the primary debtor does not.

STEP THREE: Divide the Debts. Ideally, your partner will agree to pay some of the bills. But what happens if he refuses--or if he agrees to pay but then fails to pay? We will come back to that problem in Step Four.

STEP FOUR: How Much Can You Pay? After you know what bills you will have to pay, you can figure out if you have enough money to pay them. Since you will face unexpected expenses, do not assume that you can devote all of your income to paying your bills. One of those "unexpected" expenses may be a debt that your partner promised to pay. If you signed the credit agreement, you are responsible to the creditor. It does not matter to the creditor that your partner agreed to pay the debt. The creditor may still demand payment from you.

After you finish Step Four, your finances may seem hopeless if you don’t have enough money to pay your bills. But there are things you can do to solve this problem.

Defining the Problem: The Consequences of Not Paying Bills

First, the good news: There is no such thing as "debtor’s prison." You will not go to jail just because you can’t pay all your bills. But there are consequences, including getting nasty letters and phone calls from the creditor and losing your property to repossession or foreclosure (if the loan is "secured) or being sued. We will discuss each of these consequences later, but for now let’s look at how to avoid them.

Reducing Your Debts

There are several ways to reduce the amount that you owe.

• Do You Want To Keep the "Collateral"?

If a debt is "secured," the lender may take whatever property is "collateral" if you do not pay. Sometimes, you will want to give up this property--just let the lender have it. But giving up the property does not always mean that you will not owe any more money. If the property you are giving up is not worth as much as you owe, the lender may demand additional money. If the lender demands more money and you do not voluntarily pay it, the only way the lender may collect the money is to bring a lawsuit against you.

• Negotiate with Creditors

Sometimes a creditor will agree to reduce your monthly payment. In most cases, the creditor will insist that you pay part of the payment every month. If you get such an agreement with a creditor, put it in writing.

• Letters from Creditors

When you have been late in making payments, most creditors will notify you by mail. At first, the letter may be a gentle reminder to make a payment. Eventually, the letters may seem very hostile and threatening. The intent of such a letter is to make you afraid of what will happen to you if you do not pay. But the letter itself cannot hurt you.