This is the fourth of a five part series on ‘Getting out of Debt’: Go to Part 1, Go to Part 2,Go to Part 3, Go to Part 4, Go to Part 5.

Setting Priorities

If there is not enough money to make payments on all loans, prioritize your debts. Debts you should pay first include mortgage or rent, utilities, secured loans (such as car loans), and insurance. Second priorities may include credit cards and debts to finance companies (if these are unsecured debts). Some examples of third priorities are doctor, dentist, and hospital bills. Family members and friends usually are willing to wait the longest. If a creditor is threatening to garnish your wages (get a court order to have your employer pay a part of your salary directly to the creditor), you should pay something on that debt immediately. A loan company can repossess your vehicle, whereas the doctor cannot take back the service she or he rendered. If there is not enough money to pay both bills, pay the loan company first, so you can keep your automobile. Put the doctor’s bills on hold temporarily, but notify the doctor of your plans and your intention to pay.

Use Worksheet C (Appendix C) to set up your debt repayment plan. Write down the creditor’s name in the first column. Enter the total debt owed that creditor in the second column. Write down the amount of the original monthly payment in the next column. Decide how you will repay the debt. Write down the dollar amount you can pay the creditor each month in the fourth column. If the creditor accepts your plan, write down the actual amount you will pay that creditor in the appropriate columns. Repeat these steps for each creditor.

Inform Your Creditors

Now that you have worked out a plan, do not use your credit cards, do not take out any more loans except in extreme emergencies, and contact each creditor and explain your plan. Go visit each creditor. Remember, creditors would rather receive a small payment than nothing at all. They also prefer to have the money rather than the items you purchased. If you cannot visit your creditor, call or write a letter.

A Sample Letter to Creditors is at the end of this publication. (See Appendix D.) Change the facts to fit your situation. Explain to each creditor that you do not have the money to make the minimum payment specified on the monthly statement. Be prepared to provide the following information to each creditor:

• Why you fell behind in your payment (loss of a job, illness, divorce, death in the family, and/or poor money management skills)
• Your current income
• Your other obligations
• How you plan to bring this debt up to date and keep it current
• The exact amount you will be able to pay back each month

Be honest and tell the whole situation. If you tell a creditor that you only owe two companies but you really owe twenty, you could have problems later. If you fail to follow the plan that you and your creditors have agreed upon, you will harm your chances of getting future credit. Tell your creditor about any changes that may affect your payment agreement.

Do not wait for creditors to contact you. Call the creditors before bills are due. They will be much more likely to work with you. If you owe a large amount of money and your creditors will not accept reduced payments, then you may have to consider bankruptcy or loan consolidation. A loan consolidation is a loan that will enable you to pay all of your creditors. Then you have one creditor. This single payment must be manageable in your budget.

This is the fourth of a five part series on ‘Getting out of Debt’: Go to Part 1, Go to Part 2,Go to Part 3, Go to Part 4, Go to Part 5.