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What To Do When You Fall Behind On Your Car Loan or Credit Card Payments

I would have to say that this is probably within the top five questions that come in each day to Christian  So, today you are not going to get some useless generic advice, but I am going to give you the real story on what you should do when you fall behind on your auto and credit card payments.  I am not going to address mortgages in this article, since that has been done in a variety of other blog articles I have written in recent months. 

OK, the usual disclaimers so I don’t get those “Jim, I thought you were a Christian” e mails.  As a Christian, and for that matter a decent person, you should pay your debts as agreed if you have the ability to do so.  I challenge anyone to show me the verse in the Bible that commands us to pay a debt we don’t have the ability to pay.  So that we are all on the same page here, I am not advocating cheating your creditors when you have the resources to make you payments as agreed.  It is a different matter entirely when a person simply can not pay their debts.  In today’s economy, people are losing their jobs, facing rising mortgage payments, declining home values, and experiencing genuinely tough times.  The reality is that some folks just don’t have enough money to pay everyone as agreed, and today we will break down what can be done in such a dilemma.

Auto Loans

I am going to first address the issue of auto loans, which are a secured debt and later in this article unsecured debtsSecured, as in they will repossess your car if the loan is not paid on time.  Auto repossession is an epidemic today and according to recent news reports, we are seeing more repos than at any other time in history.  This repo crisis is related to two issues.  First, our tough economy which has more and more people falling behind on all of their obligations.  Secondly, the world of auto lending has reached a point in recent years that was well beyond the absurdity of subprime mortgage loans.  Auto lenders were offering six, seven, and even ten year loans with no down payments.  They were also absorbing the negative equity of many customer’s trade in vehicles into the new loan.  Since cars are a quickly depreciating asset, these loans were much more ridiculous than even zero down subprime mortgages.  Yes, just like with homes, people bought cars they could not afford.

Historically, once you fall behind two payments you can expect the repo man at any time.  Today, due to the large glut of repos already sitting and unable to be sold, an auto lender may wait up to 90 days before picking up your car. (A bonus tip: there are some great cars you can buy now for under $3,000 to $5,000 due to the repo epidemic.) What are your options when you start to fall behind on your car payments?  

Make A Phone Call and Make A Deal With Your Auto Finance Company
The good news in all of this is that auto finance companies are facing tough times like we all are, and they really do not want your car back.  What is very easy to do with most lenders, is to pick up the phone and work out a payment plan that allows to you roll in your past due payments or even move them to the end of the loan allowing you to get back on time.  Your chances of success will vary from one lender to the next, but are probably tied more to your historical payment history than anything else.  If you have had a decent payment history, but have fallen behind just recently, chances are very good that you can work something out with your lender.  If you have been chronically late from day one, don’t be surprised if they won’t work with you.  While they don’t want your car back, if they see little chance of you being able to make your payments going forward, they won’t want to waste their time either. If you car does get repossessed, it is not necessarily too late to make a deal.  In fact, in most states you have a right of redemption to get your car back if you make the back payments.  Even without the right of redemption, lenders these days can not ignore cold hard cash.  If you have the ability to pay your back payments, chances are good that you redeem your car from the repo man.  Bad news can become even worse after your car is repossessed.  Under most auto finance agreements, the lender can sell the car and then pursue you for the difference (known as a deficiency).  Some auto finance firms are more aggressive than others in pursuing deficiency judgments, another reason to try and work things out before you face repossession. 

Unsecured Debts – Credit Cards
Since credit card debts are unsecured, you have much more leverage in negotiating when you fall behind on your payments.  There is nothing for a credit card company to take from you, since there was no security pledged when they made the loan.  I have a very clear conscience advising people to negotiate single digit interest rates when they are currently paying 20% or more on their credit cards.  Sure, they signed up for them, so they deserve what they are getting, right?  I have real moral questions about credit card rates in the 20 to 30% range, and this does not include the penalties and late fees that they so quickly add on whenever they can.  Note: you don’t have to have past due payments to negotiate a better deal on your credit cards.  Pick up the phone and demand a better deal, you might be surprised that you can many times get a better deal if you demand one.

Credit and Debt Counselors
Their are quite a few of these organizations and they all work in much the same way.  They sit down with you and assess your income and expenses. They will take inventory of your ability to pay back the principal balance on your consumer debt within a 3 to 5 year period.  These firms are organized as non-profits, but don’t be fooled – they do make money.  Debt counseling is a 7 billion dollar industry.  Currently, the largest most respected organization is the National Foundation For Credit Counseling.  This is the organization behind Consumer Credit Counseling Services (CCCS).  Most of the fees paid to the counseling agency are paid by the lenders as a percentage of the payments you make.  This is one element of the controversy behind CCCS.  Critics charge that they are really working for the creditors and not for their clients, since they are being paid in this manner.  Credit counseling firms will negotiate to get interest rates lowered and penalties waived (sometimes they can even get you to a 0% interest rate).  They will then work out payment arrangements with you and a periodic draft from your bank account.  This money is then forwarded on to your creditors.

One important fact that is not disclosed to most recipients of credit counseling, is that this arrangement does show up on your credit report.  Some lenders consider it tantamount to being in a Chapter 13 bankruptcy.  In fact, when I was working as a mortgage broker, it was routine for clients to be turned down for a mortgage simply on the basis that they had been in a payment plan through a credit counselor within the prior 24 month period.  In any case, if you can’t pay your debts and you are considering bankruptcy, this is still a much better option (although it is far from perfect).  You are paying off your debts, and being in credit counseling will not follow you for the the ten years that bankruptcy will.

Can You Be Your Own Debt Counselor?
Anyone can pick up the phone and contact their creditors and make similar arrangements as a credit counselor.  If you have the courage to do this, I would suggest this as a better option.  First, I think it is better to solve these kinds of problems without a third party when possible.  Secondly, you are in control of your money.  The dark side of the credit counseling world is that it is very common to hear of unscrupulous firms taking people’s money and then not sending it along to the creditors as agreed.  This can and does happen every day.  From what I know of Consumer Credit Counseling, you are in good hands and can trust them.  If you go with another lesser known firm, you are taking your chances.  Be sure and check out your credit counselor with your state attorney general and the attorney general of the state where they are based.  I would also Google their name look for any historical complaints or problems that you should be concerned about.

Collection Agencies
If the debt you are dealing with has been sold to a collection agency, you have even a better chance of making a deal.  Realize that most debts are sold to collection agencies for just a small fraction of the original debt.  In some case, debts are sold for as little as 2 to 3% of the original amount owed!  It is almost customary to be able to settle a debt with a collection agency for 50% of the original amount.  In some cases, I have seen settlements as much as 70% off the original debt.  When making a settlement with a debt collector, always get a letter from them in advance outlining the agreement.  I hear every day of verbal agreements made with debt collectors that are not honored.  If you make a deal to settle a $1,000 debt for $500, get that in writing before sending them your money.  If you don’t, you are taking a considerable risk that you may not have a deal after all. How To Settle A Debt

Creditor Harassment
Most people are more upset than anything about the collection calls that they receive once they fall behind on their debt payments.  Collection agencies will call you over and over again at your home and if they have it, your work number.  What most people don’t know is how easy it is to get the calls to stop.  It is one thing for you to have a dialogue with your creditors, it is quite another for them to call you dozens of times per day.  To stop the calls, simply invoke the Fair Debt Collection Practices Act.  Write a letter to your creditors and cite this law and then simply communicate that you want all future communication to be in writing and that you are demanding that they cease and desist contacting you by phone.  This simple letter will stop the calls very quickly.  The fines can be in the thousands if a creditor continues to call you after receiving what is known as a Cease Communication Letter.  I very frequently receive e mails from people sharing stories of creditors threatening to take their paychecks, place liens on their homes, etc…  As  you will read below, until a creditor has a judgment against you they can not do much if anything to force you to pay. Of course, as outline above, a secured creditor such as an auto finance company can repossess their collateral. 

Being Sued
If you default on your debts, you can be sued.  Some creditors are more aggressive than others about taking people to court.  It is highly unlikely that a creditor will drag you into court for less than a $5,000 debt.  Yes, it does happen, but it is rare.  If you are served with a lawsuit, you have a limited time to respond, don’t just ignore it.  Use the Pre Paid Legal information as listed below.  Getting a lawyer involved at this point will give you a chance to get an out of court settlement.  Known as a stipulation, an out of court settlement can break up the debt into payments over months or even years.  It is important to avoid having a creditor obtain a judgment against you, if possible.  Once they have a judgment, (depending on the laws of your state), they can start really turning up the heat on you.  Judgment creditors may be able to attach your wages, force the sale of assets you own (including your bank accounts), as well as place a lien against your home.  If you end up in litigation with more than 2 or 3 creditors, bankruptcy would be something to seriously consider.

If your whole financial world is collapsing and you see no way out, you may need to discuss bankruptcy with an attorney.  I recommend Pre Paid Legal, which is a legal service that provides unlimited access to attorneys for $26 per month.   If you file for bankruptcy, your creditors will temporally have to stop collection efforts (called an automatic stay), including any planned repossession of your vehicle.  This is a short term solution, since in a matter of weeks this protection will be removed by the bankruptcy court.  There are options you have in bankruptcy to keep your vehicle (even if you file Chapter 7 – a complete discharge of debts) and you can discuss these with an attorney.  I am not recommending bankruptcy, but it is an option for the most dire situations. A Chapter 13 Plan would provide a way for you to pay back your debts under a court approved plan.

Have a comment or question, list it in the comments section below.

Helping you make the most of God’s money!

James L. Paris
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