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When you have debts you can’t afford to pay, your options for dealing with them are limited. Unfortunately, once you fall behind with payments, your choices narrow even further. Timing is a critical factor when you are burdened with debt. The earlier you can sit down and concentrate on your debts and available cash flow, the better.

Before you react to your financial situation, take a deep breath, take stock of your finances, and make time to get informed about what steps to take to manage your situation.

In today’s tough economy, lenders (especially credit card issuers), offer different forms of payment plans that can help you get back on track. Whether they work with you is often based on how far behind you are with your payments. Sometimes your best opportunity will be to work with your creditor and come to an arrangement before your account hits “charge off” status.

When Debt Gets Charged Off

Charge off is a term used to describe an accounting function followed by lenders. Charging off a debt means the lender is no longer expecting to get paid on the balance of what you owe. The accounting function of a charge off essentially means moving your balance from the asset column (where it was while you were making timely payments), to the loss column. Lenders, especially those issuing consumer credit cards, are required to account for losses no later than what has traditionally been 180 days of consecutive nonpayment.

The Earlier You Work to Resolve, the Better Your Options

Your ability to work out payment arrangements with your lender early, and prior to your account charging off, can often bring you better results.

Some of the earliest opportunities for you to look into that may allow you to better manage your debt are:

Hardship repayment plans – Many banks offer temporary and long term lower monthly repayment plans direct to their account holders who have fallen behind. These repayment plans are not offered when you are current with payments.

Consumer credit counseling – Debt management plans available through a credit counselor provide you a way to lower your bills and consolidate your unsecured debts into one monthly payment.

Hardship payment plans and credit counseling services are good options to reduce your bills if you have the monthly cash flow to work with. You can expect to pay roughly 2% of the balance you owe as your new lower payment.

Make Arrangements Before Your Account Charges Off

Christopher Viale, President of Cambridge Credit Counseling, shared some of the benefits available to you when working with a credit counselor in order to repay unsecured debts:

  • Missed credit card payments are reflected in your credit report. If your accounts are not yet charged off by your lender, and you are able to enroll in credit counseling, some types of accounts can be “re-aged”. This means that your accounts are brought current and would not show late payments in perpetuity. Most large credit card lenders offer this courtesy if your account qualifies.
  • Missing payments typically means late fees and possibly over limit fees are adding up. Credit counseling stops these fees from being added on a forward basis.
  • Missed payments lead to your interest rates going up. Default interest rates can be higher than 30%. Credit counseling agencies are able to get the high interest charges stopped and get interest reduced on average to 8%

Once an account is charged off it cannot be re-aged. Added fees and penalties are now part of the balance owed and are seldom waived.

Get Informed. Make a Plan. Take Action

Falling behind with payments to creditors is stressful. The stress is often compounded by the calls and letters you get from creditors soon after you miss your first bill. Those frequent reminders that you have fallen behind are designed to get you back on track with a payment, but the calls can also be a source of daily frustration. If things are too tight financially, and life is moving at a hectic pace, it is sometimes easy to ignore the calls and letters.

If your accounts are not yet four to six months behind where you risk charge off, consider the following:

If you have a dependable source of income, sit down and figure out if you can commit to a lower monthly payment that amounts to 2% of your combined unsecured debt. If your monthly cash flow will support this payment, contact each of your creditors directly and ask if they have payment plans available. Ask about your eligibility to enroll in a hardship repayment plan.

You can contact a nonprofit company, like Cambridge Credit Counseling who can assist you with lowering your payments, consolidating your bills into one payment, and stop the collection calls.

This is the first part of the Debt 101 series. Inside Credit.com’s Debt 101 you will be able to access information and guidance to better understand your options to handle late bills, like credit cards. Debt 101 will help you line up your opportunities to resolve debts based on predictable patterns most collection accounts follow. Our goal is to help you learn more about how debt collection works so that you can make informed decisions that allow you to regain your financial footing.

Read the next article in the Debt 101 series: What Happens to Your Unpaid Debt?

Image: samglover, via Flickr

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