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Dangers of debt — What happens if you cannot pay?

It’s one of the worst case scenarios in your personal finances: you’re in debt and can’t pay. Perhaps you’ve been laid off or are unable to work. Even if you do still have a job, your debts have somehow spiraled out of your control.

Housing, utilities, credit card bills and loans – and now the added burden of late payment fees – are all piling up with no relief in sight. By day you crunch the numbers again and again with the same depressing results and at night you lie awake wondering what’s going to happen next.

What creditors will do
Do not just ignore your debts. With time, frustrated creditors will move to recover the money that they are owed. If you do not respond to their verbal reminders and telephone calls, they will be forced to take more drastic action. Eventually they are likely to turn your account over to a collection agency and the collection will be listed on your credit report for the next seven years.

This can make it harder to get credit in the future; even if your credit request is approved, you may end up paying a higher interest rate as a poor risk. Potential employers may reject you based on your credit record. You could end up being sued over one or more of your debts.

Possible Assistance
However, there are some ways to ease the situation before it gets totally out of control. First, your insurance might be able to help. If you have mortgage payment protection insurance or payment protection insurance, your mortgage and / or credit payments will be covered for 12 to 24 months. Short term or long term income protection will replace a portion of your former income if you become ill or otherwise disabled – the period depends on the type of policy.

Second, if you are a homeowner struggling to keep up with monthly mortgage payments, you may be able to refinance your house loan. What this does, in effect, is spread the repayment over a longer period of time, meaning you pay less per month.

Offer a Repayment Plan
If you are really stuck, contact your creditors to explain your situation. Present them with a realistic repayment plan, including the amount you can afford to pay every month and the projected time frame. It will be helpful if you can give convincing evidence of a change in your personal financial patterns, such as taking on extra hours at your job or working with a credit counselor.

Creditors do not normally want to undergo the inconvenience and expense of going to collection or to court. They may be surprisingly responsive to a well-designed plan for gradual repayment.

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Grace Chen
Grace Chen - Writer & Editor
A graduate of the Haas School of Business, University of California, which is one of the top three (3) business schools in the U.S., Grace Chen has 10 years of experience in this field and have been delivering stellar business content through her written word. She’s the chief editor of Communicate Better and has written and edited thousands of content published in various online and printed media, including the NYSE-sponsored research studies and MEC Global. Connect with Grace on LinkedIn, https://www.linkedin.com/in/grace-chen-9254ab8/

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