Being proactive with your debt

It is tempting to talk about consumers who “find themselves in default” on a loan. But consumers rarely end up in default by accident, if ever. And really, there is no excuse. I see a lot of consumers who defaulted on their mortgage, credit cards, medical bills, or other loans. I often ask whether they told their creditor that they were not going to be able to make payments, or why they didn’t make a smaller payment to stave off default.

Most look at me with a blank expression.

So let’s fix that. If you are facing a loan payment you can’t make, here are some of your options:

• Skip it
• Pay part of it
• Call your creditor

If you skip the payment, your credit report will get dinged fairly quickly, and your score will drop. Maybe this is a good thing for you, since you obviously aren’t good at managing your credit. Making payments probably the single most important thing you can do to maintain a good credit score.

Next best is to pay part of the scheduled minimum payment. This way you avoid negative consequences to your credit report, and you stave off default (or foreclosure, if you are in a home). Not forever, but for a while. Of course, you also aren’t making much progress toward paying off the debt, but you are keeping yourself from sliding too far downhill. Creditors get paid more when you make payments. Their remedies if you stop making payments are not all that great, so they will generally let you go along making partial payments for a surprisingly long time.

If you are facing a crisis or a prolonged diminishment of your income, it is time to pick up the phone and call your creditor to try to work something out. If the debt is a credit card, you can ask them to give you a break on interest for a few months, accept smaller payments for a time, etc. They want to get paid, so they should work with you, although it might not be an easy thing to convince them. Same goes if the debt is a mortgage. If you have no equity in the home, maybe the lender will accept a deed-in-lieu of foreclosure. If you do have equity, maybe the lender will agree to hold off on foreclosure for a few months while you try to sell the house. Or maybe you can refinance to your advantage.

There may be other remedies, as well, especially with real estate. In this market, the lender will not make much money if they end up with the deed to the house, so they should be more disposed to work with you. If you are elderly and own a home, for example, you may be able to take out a “reverse mortgage,” in which the bank pays you out of the equity you have in your home.