You're Buried In Debt What Should You Do? And How Do You Deal With Collectors?

No one wants to be in debt. But unfortunately, for various reasons, it happens.

In this post, we're going to go over what you can do.

But first, let's get one thing clear: You won't go to jail for not paying your debt. For one, as far as I know, that's not what the law says. So unless you issued bouncing checks (Estafa), you aren't under any threat to go to jail.

Second, that's not in either party's interest. You obviously don't want to go to jail. But your creditors won't benefit from it either. How can they get their money back if you're in jail and not earning money?

So whatever threat or legal jargon gets thrown at you, don't fall for it.

Having said that, it's still your responsibility to pay your debts. So here's what you can do.

Before your creditors start calling - and hopefully even before they notice anything...

Make a payment plan.

Determine how much money you are earning. Subtract the bare minimum you need to survive - food, fare money to get to work, rent/mortgage, utility bills. (It may also include tuition or healthcare costs)

The remaining money is what you have to pay your debts.

For the time being it's best to simplify your life and cut out as much unessential expenses as you can. I still advice finding a way to unwind and enjoy every once in a while (regularly, even) but for the time being it would have to be through very cost-efficient means.

Once you get an idea of how much money you can put into paying off your debt it's time for the next step.

Talk to your creditors.

Hopefully you only have one. Regardless, it's best to do this early. It may be beneficial to be proactive and raise the issue yourself; maybe even before they notice it.

Agree on a payment scheme.

Explain your side. Expect that they will be angry or try to pressure you to pay. Be calm, cool and composed. Assure them that you want to pay them.

At this point, it's going to be a numbers game - and that's why you analyzed your finances before initiating the talk.

They'll want as much money as they can, and you'll want to pay off the debt quickly. However, giving them the maximum you can won't necessarily be the most prudent approach. If an emergency comes up, you'll have no money to use and may end up borrowing again.

If you're single and living with your parents, giving them as much as you can afford can be a viable option. But if you're a bread winner or otherwise have dependents, then you're going to have to stash some money for emergencies.

Get everything in writing.
  • your agreement
  • how much you're paying
  • the schedule of payments
  • receipts or acknowledgements of payments you have made.
  • when the time comes, documentation that you have paid off your loan.

What if your creditors are already calling on you to pay?

If you have already failed to pay, it's past due, you're in default, etc. And your creditors are already calling to collect their money...

Verify first if you are talking to the bank (or whoever your original creditor is) or merely a collection agency.

If talking with a bank/original creditor, then proceed as mentioned above.

If talking with a collection agency, or some other person/entity than your original creditor: talk to your bank/original creditor instead.

As much as possible, never deal with a collection agency if you can avoid it.

To explain why, please allow me to ramble on for a bit.

Banks make money through loans; that's their bread and butter. But they charge high interests not just to make more money. They understand that even though they're careful, it's possible that the debtor may not be able to pay. They're essentially betting that with their screening and the sufficient interest, they'll make more money than they might lose.

When a debtor cannot pay, that's what they call a "non-performing loan". Eventually, a bank may give up on these bad assets and dispose of them (for loans without collateral; obviously they just repossess if they can).

In the U.S., collection agencies buy these bad loans from the bank. They buy it at a fraction of what is left to be collected. So a bad loan with 10,000 left to collect maybe bought for just 100 or less. The collection agencies then do their best to collect on the loans - with interest. This way, they can make money from nothing but "perseverance". In the Philippines, the system is probably roughly the same.

This is also why it's best not to deal with them as much as possible. Your original creditor is more interested in recouping their capital - the money they loaned you. A collection agency is interested in getting as much money as they can, because in all likelihood they may not get a lot of the loans they bought to pay off. Which means asking usurious interest charges from you.

So better to contact your bank/original creditor and settle the issue with them directly.

However, its possible that they have already let this go and you will have to deal with the collection agency.

If this happens, it's important to recognize that you have the upper hand.

Collection agencies can only harass you. And they can't do it personally. For one, they'll get dangerously close to committing a crime - possibly assault or damage to property if they get really reckless. Actually even harassment is a crime. Second, they probably have a lot more people to bother and collect from.

Worst case scenario, you can change phone numbers and email addresses to avoid the brunt of their harrassment. I'm not saying don't pay them; you still have a responsibility to pay off your loan.

But don't let them dictate the terms. Remember: they're desperate to get money from you. You, on the other hand, cannot go to jail just for not paying your debt. So don't let talks of demand letters or other legal rigmarole scare you.

Instead, make a payment plan - on your own - as discussed above.

Relay what you are willing to pay to the collection agency. Again, just to emphasize, you should still have some money left to save in case of emergencies.

Expect that they will not agree and will ask for the entire amount in one payment - including huge interests.

Insist on paying only the principal amount and a reasonable interest (since you did default on your loan). Be firm. State your financial situation, that you know people don't go to jail for not paying debts, call their bluff on whatever threat they're making, and tell them they can agree to your terms and get their money or they get nothing.

(Just to boost your confidence: I personally know someone who owes a bank, and just flat out refused to pay. He's blacklisted, won't ever get another bank loan, probably can't get a credit card or maybe even open an account. But he's still free and otherwise not inconvenienced. A collection agency doesn't even have the power to blacklist you. I don't advise not paying your loan, I'm just saying you've got more leverage in negotiations than the collection agency would want you to know.)

Hopefully this post was helpful or at least gave you some confidence in dealing with your debt. If anyone out there has experience or knowledge on the topic, please share them by leaving a comment below. That way, everyone can benefit.


If you liked this article, please subscribe to my feed, like me on Facebook, circle me on Google+, or follow me Twitter @thePFApprentice. It's free, you won't miss new articles, and you'll also get my free ebook: the Super Savings Guide.

Enter your email address for your free subscription






photo credit: Images_of_Money via photopin cc

2 comments:

  1. This is spot on, unless you issue a bad check and are convicted of estafa, not paying your debt is not a ground for imprisonment.

    And good on you for reiterating the necessity to pay the debt because it's your responsibility. I know a lot of people who will just happily develop debt amnesia because there's nothing to scare them into paying it back.

    ReplyDelete
    Replies
    1. Thanks Jill!

      Had to emphasize; people who borrow from me might decide to not pay back hehe

      Delete