By Michael Bovee, Consumer Recovery Network
When you get to the point where you can’t pay your bills one month, you find yourself looking at what you can do to squeeze by. Delay a payment here, take from this allocated amount and apply it over there, pay a bill with a credit card to float you until the next payday, etc. A varied assortment of payment gymnastics can be implemented to get through a short term cash crunch.
My daughter’s gymnastics coaches used to refer to the daring process of throwing one’s body in the air while twisting or spinning on any give apparatus as “throwing tricks.” If you don’t land it… ouch!
If you are throwing personal financial tricks with your monthly budget, it can feel like balancing on a 4 inch wide wooden beam. How long can you keep your balance until you fall? Falling off the financial beam can hurt just like a broken bone, but can take far longer to heal.
If you’re throwing tricks with credit card payments and hit the mat (missed payments), you have several options.
You may already be aware of the ability to get your monthly credit card payments lowered through the use of a debt management plan (DMP) offered by a credit counseling agency. What you may not realize is that, in some cases, you can implement your own DMP. You begin by talking to your creditors about the situation: yes, the same creditors who may have jacked up your interest rate in the past, or who lowered your available credit limit to the balance you are carrying now.
[Resource: Consumer Guide: FTC Debt Relief Rules]
How Creditor-Sponsored Hardship Plans Work
If you’ve called in the past and were rebuffed in your efforts to get your interest rate or payments lowered, don’t be surprised if you get a different reception once you have fallen behind. The creditor you are speaking to after missing payments, while same in name, often has a totally different attitude than when you were current with payments and looking for a break.
Credit card issuers are not too eager to limit their profits by cutting you some slack when your payments are on time. When you miss a payment, though, they will often reach out to you almost immediately with phone calls and email reminders. The initial calls are frequent, because statistically they know that is the best time to get your account turned around. In the initial calls you may or may not hear about offers that would allow you to catch up by lowering your interest or payments.
What do some of the hardship plans look like? It will depend on the bank and your level of delinquency, but here are some examples of what may be available:
- Temporary hardship plans. Your monthly payment is reduced to 2 or 2.5 percent of your current balance, usually for 6 or 12 months. Your interest rate is reduced to anywhere from zero to 9%. Penalties and fees are often waived. When the term of the plan expires, your account will revert to the pre-plan arrangement. This may be the temporary reprieve you need, allowing you to step off the balance beam for good thereafter.
- Longer term and life of balance hardship programs became more common when the economy fell off a cliff. They are still available, through many of the larger credit card issuers today. Your balance will be frozen and the account closed. You will be required to pay the full balance off in 5 years (60 months) or less.
- Less than full balance settlements. If your accounts are seriously delinquent (usually more than 3 months) you may get an offer to settle the debt for less than you owe. You will have come up with a lump sum of money, or the ability to fund a settlement offer in a short period of time—say 3 installments—in order to take advantage of one of these offers. But they can be very attractive, ranging from 40 to 60% of the amount you owe. The offer you receive will depend on the creditor’s policies, as well as their evaluation of how much they think you can pay.
[Resource: Consumer Guide to Debt Settlement]
An additional benefit: If you agree to pay your balance in full over time, your creditor may agree to “re-age” the account after 3 or more on-time payments on the plan. This means they may consider removing the 30-, 60- or even 90-day late pays from your credit reports. This offer typically does not extend to settlements.
Image by Ryan J. Wilke, via Flickr