|
Below is an example of a situation, which illustrates how quickly a person can experience difficulty meeting financial obligations. Take a moment to read through it. We encourage you to take action before you find yourself in a similar situation. Remember, if you are facing financial hardship for whatever reason, call your creditors immediately and try to work something out with them. Taking this first step is the best way to work out a payment plan and may preserve your ability to be considered a good credit risk in the future.
Lucy is just out of college. She has a credit card in both her name and her mother's. She is not the "legally" responsible party for the charges to the account. Now that she is a college grad she thinks she wants "financial independence" and the freedom that will come with having her own credit card. Lucy is interviewing for jobs but is working as a temp until she is able to land her "dream job," which she hopes is "just around the corner". Lucy applies for and is granted a credit card that advertises no interest for 90 days. Her credit card limit is $2,500. While she has achieved financial independence, she does not understand that, after 90 days, the interest jumps to twelve (12%) percent per year. This means she will pay 1% per month for the outstanding balance.
The first month Lucy charges $800.00 and pays only the "minimum amount due," leaving a large amount unpaid. She then charges an additional $900.00 the second month. Again, she pays only the "minimum amount due," which, of course, leaves her with an even larger unpaid balance. In the third month, Lucy "maxes out" her credit card account by charging $1,000.00. Because she has exceeded her $2,500.00 credit card limit, she is charged a $25.00 over-the-limit fee. The "minimum amount due" is approximately $400.00 per month. And, the interest–free period (first three months) has ended, which means interest will now start to accrue at the rate of 1% per month. Also she will be liable for a late fee of $15.00 each month her payment is late. Even if she makes her next "minimum amount due" payment of around $400, if she is late or if the interest accrual puts her over her credit card's limit, she will continue to accrue so-called "over-the–limit" fees. It is no wonder when the account finally charges off (debt considered uncollectible by the original creditor) 180 days after Lucy fails to make any payments; the balance on her credit card account is over $4,000.00.
Lucy does not find her dream job but continues to work as a temp. Although she is able to keep up with her other financial obligations, rent, utilities, car payments and food, her student loans become due 6 months after graduation. Now, because of the credit card account (and her failure to act financially responsible), she is "robbing Peter to pay Paul", as they say. If she pays her credit card bill, she will have no money for rent. If she does not pay the credit obligation, she will receive statements with an ever-increasing balance and, ultimately, will be reported to a collection agency. And, if the credit card account is not satisfied while the account is with the collection agency, the account will then likely be turned over to an attorney. The attorney who has been asked to help in the collection of the debt will likely (and accurately) inform Lucy that if she is sued, and a judgment is obtained against her, Lucy will not only be liable for the credit card debt, but Lucy will have to pay all of the court costs and the credit card company's attorneys' fees.
The situation is horrible. But who is responsible? The credit card company? The collection agency? The credit card company's attorney who is planning to sue Lucy?
Lucy is responsible. She accumulated the debt. The question is what does she do now? She could do nothing. Or, as pointed out in the beginning of this article, she could get in touch with all her creditors and explain her situation and work out payments.
Ignoring the situation will not make any of Lucy's credit obligations go away. Unless she reaches out to her creditors – landlord, heating company, telephone company, electric company, car financing company, or credit card holder – they are in the dark regarding her financial situation. These days many different creditors routinely report bad debts to credit reporting agencies. The largest of these agencies are Equifax, TransUnion, and Experian. Not only will a bad credit rating prohibit Lucy from being granted more credit (needed for such things as cell phone accounts, overdraft protection on checking accounts, or car loans), but many employers perform credit and financial checks on prospective employees. If Lucy is sued, the creditor may obtain a judgment. In some states judgments are valid for ten or as many as twenty years. Depending on the state in which Lucy lives, creditors with judgments may attach her paycheck, place a lien on her house, or even seize Lucy's personal property. A judge (not Lucy) may be asked by the creditor to determine how much Lucy should pay each month. If such a monthly payment order is issued, and thereafter the judge believes that Lucy has intentionally refused to comply, Lucy may even be held in contempt of court and imprisoned. It only takes one late payment on one bill to hurt your credit rating, your credit score, and, potentially, your lifestyle.
On the other hand, if Lucy contacts her creditors and lets them know about her situation, they know, at the very least, she understands she has a responsibility to repay her creditors. Moreover, they may be able to help her actually pay off her obligation and preserve her credit score. Generally, creditors are willing to provide debtors with an avenue to work themselves out of debt. For the most part, only when debtors ignore their financial responsibilities do they end up facing harsh consequences for failing to pay their bills.
What would you do in a similar situation?
|