What to Do When You’re Broke and Can’t Pay Your Bills

which bills to pay first

I sat at the kitchen table, head in my hands. My husband sat across from me, equally worried. We had no idea what to do. The money gifted to us at our wedding was almost gone. With summer approaching, we were months away from our next disbursement of financial aid. I was pregnant, and we were both looking (unsuccessfully) for jobs. We knew we didn’t have enough money to pay all our bills. And we didn’t know what we’d do for the next month.

That scene is 15 years in the past for me, but today that circumstance is all too real for many Americans.

Nearly 25 percent of Americans can’t pay all of their current month’s bills in full, according to the Federal Reserve. When you’re in that situation, it’s hard to find hope. However, with knowledge of which items you can let slide — at least for a month or two — and a plan to move forward, it’s possible to overcome and gain better financial footing.

3 questions to ask when deciding which bills to pay first

Having a framework to evaluate your bills can help you decide which to focus on first, according to certified financial health counselor Holly Morphew. She recommended evaluating each bill by asking the following three questions:

1. What are the consequences for a late payment or failure to pay?

The first question is to review the consequences. While it’s extremely important to pay your credit card bills on time as much as possible, the reality is that sometimes you have to make hard choices.

“Most of the people I’ve helped believe credit cards should be paid first,” Morphew said. “However, the consequence for a late credit card payment or a missed payment is damage to your credit score. Eventually, if you miss enough payments, wage garnishment could be a worst-case scenario.”

On the other hand, Morphew pointed out, the consequence for missing your mortgage payments could mean foreclosure. If you miss rent payments, you could be kicked out of your home. Losing a place to live is a more significant consequence than ending up with dings on your credit report or seeing your wages garnished, said Morphew.

2. Can something be taken away for non-payment?

Just like missing mortgage or rent payments can cause you to lose your home, pay attention to what can be taken from you. “A car loan is secured with your car, so failure to pay means the lender can repossess your car,” Morphew said.

Once that happens, you might lose your means of getting to work — landing you in deeper financial trouble. If you have to make a choice, it can make sense to skip a credit card payment or perhaps talk to your utility company about hardship programs that can get you help with your bills.

3. Is it essential for survival?

Morphew also said bills should be evaluated based on need. “Food, diapers, and utilities should be considered essentials,” she said. It’s also important to make sure you have proper insurance coverage to ensure that you can continue driving your car. Health insurance is also important for maintaining access to medical services — especially for children.

Financial coach Craig Dacy offered a similar framework for deciding which bills to pay first. He recommended focusing on housing, food, utilities, and transportation. “These are the basic essentials that we want to keep current in our finances,” Dacy said. “Once those are taken care of, we can prioritize the remaining bills to decide which ones get paid.”

Steps to take when you can’t pay your bills

Once you realize you can’t pay your bills, said Dacy, it’s time to go on the offensive. You might have to skip paying some of your obligations this month, but you want to get back on track as quickly as possible.

Cut non-essentials

One of the easiest ways to avoid paying bills when you’re broke is to reduce the number of bills you have in the first place. When my then-husband and I were trying to figure out our next move, we realized that it made sense to cut out cable TV. Not only did we ditch cable, but we also got rid of one of our cars. Having one fewer car significantly cut our expenses, including the car insurance bill.

In addition to canceling recurring services that aren’t necessary, Dacy suggested reviewing your spending to identify other areas to focus on. “Cut spending to free up some money,” he said. “Take a month from eating out and look for other ways to help get the ball rolling for financial relief.”

Talk to your creditors

If you know you can’t make payments, get in touch with the lender.

“Whether you owe an extra month on your cell phone bill or are three months late on your credit cards or student loans, you must take the initiative to speak to those companies about your situation,” said Alexis Busetti, a financial coach and the owner of Cistern & Grove, LLC Financial Coaching.

Busetti said that even though calling your creditors can be unnerving, many creditors might be willing to work with you on a new payment arrangement. When you contact credit card companies, ask for the hardship department. With student debt servicers, you can ask about income-driven repayment plans for federal loans.

Reaching accommodation can help you better manage cash flow and reduce the chance that a creditor will come after your wages or take other action.

This approach can also work with utility companies, according to Morphew. “If you are struggling to pay utilities, know that most providers have programs that offer assistance to you while you’re [going through] financial hardship,” she said.

Look for ways to bring in more money

Once you’ve cut your costs and worked out arrangements to pay your obligations, Busetti suggested looking for more income opportunities, including working overtime, getting another job, or starting a side hustle. Having more money come in through other means can help you catch up with your bills — and position yourself to avoid getting caught in the same trap again.

Dacy agreed that extra work could help you keep up with the bills. However, he also recommended selling some of your items. If you can raise some immediate cash by selling things you don’t need, that can alleviate some of the pressure as you use the proceeds to tackle the most pressing bill.

Make a plan

Know what you can give up, and what you have to pay at all costs. In the end, having a plan can go a long way toward finding peace of mind.

Create a plan for tackling your debts and paying your bills through a combination of reducing expenses and earning more money. While it might take some time to get on your financial feet, it’s possible and completely worth it.

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1 Includes AutoPay discount. Important Disclosures for SoFi.

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SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.19% APR to 11.32% APR (with AutoPay). SoFi rate ranges are current as of July 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 4.99% APR assumes current 1-month LIBOR rate of 1.22% plus 3.95% margin minus 0.25% autopay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
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