1. Make sure you don’t have any other options – People tend to wait until the big bad banker is knocking on their doors before they’re motivated to take action; don’t be one of those people. In many cases there may be an option open to you that you hadn’t considered or never heard about before. Do your research at the first sign of trouble. That doesn’t mean wait until you lose your job and can’t make your payments. It means if you’re over 80% LTV, you need to create a “What if plan.” What if you lose your job? What if the real estate market in your area tanks (again)? What if you get into a car accident and can’t work? You may think there’s no chance of you foreclosing on your home, but fortune favors the prepared mind.

2. Call your bank right away - In most cases, your bank really, really does not want to foreclose on your home, especially if you don’t have a good amount of equity built up, which is likely the case if you’re facing foreclosure. If the bank decides to foreclose, they have to deal with all kinds legal fees and holding costs. Then, if the bank decides to sell the home at auction, it’ll go for 10-30% or more below market value. If you have a $300,000 mortgage and your home is only worth $300,000, in a good scenario, the bank may only be able to recoup $270,000 or less; that’s a $30,000 loss. If the bank stands to lose less money by you not making your payments for a little while, or, working out a deal with you, they may just take it.
3. Prioritize your bills – In our deceptively titled post, How to Get Away With Not Paying Your Bills, we go over all the details of how to prioritize which bills you should pay and which ones you can let slide for a bit if money gets tight. Everybody should read this post, but especially if money’s tight.
4. Post a Comment – We can offer some advice, and who knows, maybe someone reading has gone through the same thing and could lend some support or a helping hand. If you’re uncomfortable with that, contact us and we can offer some advice.

Even though you may think you have plenty of equity in your home, you should just double check; many areas around the U.S. are soft markets right now, and values may be going down even further, so be sure to keep an eye on things.

As always, if you have any questions, get in touch with us and we can offer some assistance.

You should always keep this in mind: You must be proactive with your finances because by the time you are really in need of some money, you probably won’t be able to get any. For instance, if you’re overdrawn on your checking account, you probably won’t be able to get another account or a credit card anywhere until you pay the bank. If you’ve missed a few mortgage payments you won’t be able to refinance and access that equity in your home at a reasonable rate. You absolutely must secure some backup funds as soon as it appears that cash may be tight in the future. If you’re about to change jobs, make sure you’ve got plenty of room on your credit cards or you open up a line of credit on your home so you have some room to breath. In fact, I recommend you always have 6-12 months of expenses available to you in the form of cash reserves at any given time in case disaster strikes. The last thing you want is to suddenly find out you’ve been laid off from your job and not have any money saved up or any credit available to hold you over until things pick up again.

If you don’t have 6-12 months of expenses available to you right now, get it today; you’re in a very dangerous situation. Get a credit card that you don’t use and keep it for a rainy day or open up a line of credit on your home just in case. Once you’ve done that, start saving, because, ideally, your 6-12 months of reserves should be in the form of liquid cash.

This is a simple solution that will save you so much stress and heartache should you run into some financial problems, and trust me, you will run into financial problems at some point, you better be prepared when it happens.

My God college is expensive! Like a lot of my friends, I was broke as a joke in college. I got some help from my family and student loans, but I also held a part-time job and used credit cards to cover some of my expenses. I’m sure most of you reading this have gone through times when you were pretty tight on cash; if you haven’t, I can tell you as an expert in being broke, it’s no fun at all! The problem is, and I outlined this a bit in The Credit Debt Spiral, anytime cash is short, you’re teetering a lot closer to the edge of bankruptcy than you may think. However, with some little nuggets of knowledge, you’ll know what to do if times get tough; I mean, let’s face it, it’s no fun to plan for a fire, but when that blaze is roaring, you’ll be thanking your lucky stars you mapped out your escape route ahead of time.

Prioritize Your Bills

So, in the event that you can’t pay all your bills, you need to know what to pay and what to hold off on so you can still eat until you get your finances back in order. Make sense? Great.

First of all, ditch the utility bill. A lot of these financial people will tell you that the most important thing after your mortgage is that you have heat and electricity for your family. Sure, problem is, most utility companies won’t cut you off if your a month or two late on the bill, in fact, I once went 5 months without paying my bill before they threatened to turn off the electric. They’ll send you a notice shortly before they decide to shut off the utilities, and this is one case where procrastination can help you.

You should hold off on any phone bills as well, but be prepared to pay them quickly if you get a notice of cancellation. The phone company usually won’t shut off your service if you’re only a month or two late, especially if you call them and tell them your situation and that you’re going to pay the bill in a week or so. Again, they’ll send you a notice before they shut off your service, or call you, which will give you a perfect opportunity to negotiate a future payment date in exchange for keeping you connected.

The utility and phone bills won’t affect your credit report, so don’t worry about lowering your credit score due to late payments. (Note: I did see a utility bill show up on a client’s credit report once before, so if you’re going to do this, you need to find out whether your utility and phone companies report to the credit bureaus).

The 30 Day Rule

Any bills showing up on your credit report should be paid before they’re 30 days overdue. Late payments on any credit account won’t be reported to the credit bureaus as late unless the accounts are at least 30 days overdue, so that should give you a little bit of extra time to get caught up. Be careful with this; if you let your accounts go over 30 days past due, your credit score will drop and your report will note that you were 30 days late (or however late you were). If you try to get another credit card in the future, the bank may not like this too much. If you’ll be looking to purchase a house or refinance in the future, the only lates the bank will care about are mortgage lates, so, other than lowering your credit score, late credit card payments alone won’t affect your ability to get a mortgage.

So what’s left? Your mortgage or rent. I’ve been late on rent several times in the past and, my landlord, a decent size company, didn’t serve a “Notice To Pay Rent Or Quit” until day 20 or so. If your landlord is just some guy you know who rents a room in his house you may have a little more leeway, but in my case, I would have had more time to get back on my feet had I owned a home; albeit, not much more time.

If you own your house, you absolutely must ensure that you don’t go 30 days or more overdue on your mortgage! You can go right up to 29 days if you want, but you’re in for a world of hurt if you go 30 days or more overdue. If your mortgage is 30 days or more overdue, it’ll show up on your credit report and affect your ability to purchase or refinance a property for the next year or more, depending on your credit history. Here’s why: banks are pretty strict on late mortgage payments; if you have even one late mortgage payment in the past 12 months, you’ll automatically be classified as a “sub-prime” borrower, and we all know from my article on subprime mortgages that you don’t want that. If you’ve had a bankruptcy in the past 7 years, those 12 months are extended to 24 months.

Keep in mind, these are all band-aid solutions, meaning they only address the symptoms, not the illness. You can only get away with not paying your bills for a limited time and, once that time is up, you’ll have to come up with the money or really kill your credit. I did all these things when I switched jobs and had $5,000 stolen from me, but only because I knew I’d be back on my feet in a month or so.

Bills You Can Usually Get Away With Not Paying for a Few Months

1. Don’t pay the utility bill until you get some sort of notice of cancellation [time-frame: 3 months]
2. Don’t pay your phone (cell or land-line) bill until you get some sort of notice of cancellation [time-frame: 3 months]
3. Don’t pay any other bills until they are coming up on the 30 days overdue point [time-frame: 29 days]
4. Don’t pay rent until they threaten to toss you out
5. Don’t pay your mortgage until it’s 20 days or so late (but for God’s sake, make sure the bank gets the payment by day 27 or 28 so they have time to process the payment) [time-frame: 20 days]

A lot of us carry debt, and there’s certainly nothing wrong with debt in moderation, but it can get away from you and spiral out of control; and it can happen a lot easier than you may think. A lot of us carry some debt, but it’s easy to let it get away from you, even if you don’t have a whole lot of it. Let me illustrate this with an example.

The Example of Kelly

Kelly is a 23 year-old college who’s about to graduate and get out into the professional world. She had a full-time job in college, but, with the current cost of even a public university, she managed to rack up $25,000 in student loan debt. She’s a smart girl and calculated that the monthly payments on her student loans, which carry only a 3% interest rate, would be manageable when she gets out into the workplace after school if she can get a decent job. She knew that going into credit card debt was not something she wanted to do, and through smart money management, she kept her credit card debt to almost nothing. She’s soon offered her dream job with a great company in Southern California; the only issue is that she’s from Ohio. She thinks about it and decides, although she’d incur some expenses moving across the country, the opportunity to work for such a successful company will pay off in the long run, so she accepts the offer.

She graduates in May and doesn’t start at her new company until July, so she’s got time to kill, but is having trouble finding a company that will hire her for only 2 months until she moves to California. She’s living at home until she moves, so she doesn’t have a whole lot of expenses and she manages to round up some money to hold her over by selling some things on eBay. Finally, it comes time to move, but she doesn’t have any money saved and charges all of her moving costs. She got pretty good at living off pennies a day in college and manages to keep her total cross-country moving expenses to $1,000.

When she finally gets out to California she needs to put a deposit on an apartment and, since she doesn’t have any money saved up, she gets a cash advance on her credit card for the deposit and first month’s rent, a total of $1,900, bringing her credit card balance to $2,900. She knows it’ll be worth it if she can just hang on until she starts getting paid at her new job.

She needs to buy some various household items for the new pad and, being a smart consumer, decides to get another credit card to pay for the items so that her balance on her first card doesn’t go over 50% of the limit of $6,000. She charges $1,500 on the new card to cover the cost of a mattress and other various household items. She doesn’t have a problem getting a 0% intro APR card because she’s always made her payments on time and her credit score is 750. Now she has $4,400 in credit card debt and $25,000 in student loan debt, but the jalopy she drove through college suddenly breaks down and she needs to buy a car. She takes out an auto loan of $8,000 for a reliable, reasonably priced car.

Her total monthly debt payments are a lot more than they used to be, but she’s started getting paid at her new job and is bringing home $3,000 a month after taxes, so she’s able to pay a little extra and plans to completely pay off her credit cards in a year.

Kelly’s Situation Worsens

After only 6 months at the new job, the market turns and she’s laid off. She really hasn’t had a chance to save any money and, though she got her credit card balances paid down to $1,500, she has to charge her living expenses, including her rent, until she finds another job. She’s in real estate and since the market turned, it takes her 3 months to find another job; she charges all of her living expenses during that time. She was down to $1,500 on her credit cards, but over the course of 3 months unemployed, charges another $5,700. Now she’s over 50% of her limit on her 0% APR card and about 40% of the limit on her other card; as a result, her credit score drops to 700. Because of all the stress of being laid off and searching for a new job, she ends up forgetting to pay her 0% APR credit card bill; as a result, the company cancels the 0% intro period and jacks the rate up to 20%. Additionally, the company re-evaluates her credit and decides to reduce her credit limit to $3,000, just to be safe. Unfortunately, she’s now at 100% of the limit on that card and her credit score drops to 680.

Her new job doesn’t pay nearly as much as the original company and she’s barely able to make her minimum monthly payments. She realizes she’s in a dangerous situation and decides to get a personal loan with her bank, unfortunately, her bank won’t approve a loan because she’s only been at her new company for a couple months, her credit score’s dropped to 680, and her only available credit is on a card with a balance over 50% of the limit; her other card is maxed out.

Then one day her car breaks down; as if she needs this now! She has to charge another $1,000 for repairs. Her situation’s become pretty sticky; her two credit cards are now maxed out and, because of this and her credit score, for the first time in her life, she can’t find anyone to give her another credit card or loan. She’s really feeling the stress now and realizes that if one more financial problem strikes she’s not going to be able to cover it. She starts searching more for someone to give her a loan, or at least consolidate her credit cards so she can lower her monthly payments. During the search, she has her credit run at 10 different companies, all of which deny her request for credit. Those credit inquiries lower her score even more and now she’s feeling a little ashamed of her 630 credit score. She’s never been in serious debt before and is starting to have panic attacks as a result of all the stress. She goes to the doctor and is prescribed an anti-anxiety medication, unfortunately, her individual insurance won’t cover the medication because she took it 7 years ago when her parents were going through a divorce and the insurance company is calling her anxiety a pre-existing condition. Now she’s paying $130 a month for her medication that her insurance won’t cover.

Now She’s In Trouble

Kelly, a smart girl who’s always taken care not to get into a lot of debt is now barely making her minimum monthly payments and has absolutely no extra funds to save for a rainy day. She feels like she tried really hard to keep from getting to this point, but just got hit with a couple bad luck streak, none of which would be a big deal, individually, but combined, they’ve taken her on a ride that a surprisingly large number of otherwise responsible people get caught up in every year; I call it the debt spiral.

So, how could Kelly have avoided this situation? I’ll cover that in part 2 of my debt spiral series.