This blog was originally posted on March 20, 2020 and was updated on June 17, 2020
Dealing with debt can be a stressful experience. As you plan for the potential economic impact of coronavirus, there are a number of steps that you can take to help manage debt in these difficult times.
Contact your lenders if you are at risk of missing payments
If you think you may fall behind on your payments for your mortgage, auto loan, credit card, student loan, or other debt, call your lender and explain your situation. Credit card companies and lenders may be able to offer you hardship programs, also called "accommodations," to help you. In order to receive an accommodation, you must reach out to your lender proactively.
These programs may include allowing you to temporarily delay or adjust some payments. In some cases, you may be allowed to avoid interest charges. You may also be able to avoid negative credit reporting if you enroll before you become late on your payments. Your lender may also offer longer-term programs, such as work-out plans that allow you to pay back debt over a set period of time at a reduced interest rate. We’ve got more information on how to protect your credit from the impacts of the coronavirus pandemic, including new information on the CARES Act.
Many lenders are facing high call volumes because of the pandemic, so the wait time may be long. You can also check your lender’s website to see if they have information that can help you, ways to communicate electronically, or online applications for hardship programs or accommodations.
When contacting your lenders, be prepared to discuss your financial and employment situation, as well as how much you can afford to pay considering your income, expenses, and assets. You may also ask them:
- Do you have hardship programs for people experiencing financial loss due to the coronavirus pandemic?
- What are the financial consequences of enrolling in a hardship program?
- Will I owe more overall?
- Will this affect my credit limit?
- Will this affect my credit reports?
- If I am still having financial trouble at the at the end of the hardship program, what are my options?
Has a debt collector contacted you?
If you currently have a debt in collections, you can work with collectors to identify a realistic repayment plan. We have a number of resources for contacting and negotiating with debt collection companies.
Know your rights. The Fair Debt Collection Practices Act (FDCPA) says that a debt collector is not allowed to use unfair practices in trying to collect a debt.
If you believe you do not owe the debt or that it's not even your debt, you may dispute all or part of the debt by calling or writing. If you send a written request, the debt collector must stop collection on any amount you dispute until the debt collector sends you information that shows you owe the debt.
Under other legal requirements, you generally cannot have your Social Security or VA benefits, as well as some other benefits, garnished by a lender or a debt collector.
Wondering how to respond to a debt collector?
Our sample letters* can help if you:
* These letters are not legal advice. You'll also want to keep copies of any letters you send.
Consider working with a credit counselor
Credit counseling agencies are generally non-profit organizations that can advise you on your money and debts. When working with a credit counselor, you should be prepared to discuss your financial situation, employment status, and your financial goals, as well as your regular income and expenses. When you work with a credit counseling agency, make sure that they can help you assess how to manage all of your debts. If you are also paying a mortgage, many also do housing counseling.
Reputable non-profit credit counselors often offer initial budgeting sessions at no cost. A non-profit credit counselor could help in the following ways.
- Help you identify ways to adjust your expenses so that you can pay your debts more quickly, as part of your initial free budget analysis.
- Assist you in sorting out the types of emergency hardship programs available to consumers by lenders and whether they make sense for your financial situation. This can be helpful if you have a lot of accounts or are having difficulty sorting through your options.
- Suggest that you consider enrolling in a debt management plan. These programs seek to provide a consolidated monthly payment that the credit counseling agency then pays to all lenders over a set period of time. This generally involves closing most of your accounts and setting a fixed repayment plan, usually at a reduced interest rate. Credit counseling agencies often charge fees for these services and there may be initial impacts to your credit worthiness due to closing accounts, so make sure you understand how the program works before you sign up.
- Help you determine if it would make more sense to explore bankruptcy and provide you with resources for next steps.
To find a credit counselor, you can try the Financial Counseling Association of America, or by phone at (800) 450-1794, or the National Foundation for Credit Counseling, or by phone at (800) 388-2227.
Be careful when looking into debt relief
When researching debt relief options, make sure that you understand how the program works and potential risks of enrolling in it. There are many companies and organizations that advertise that they can help you find “debt relief” by simplifying or reducing your debt, “consolidating” your debt, or negotiating your debt. However, the actual programs offered can differ quite a lot.
You should make sure you understand whether the company is offering:
- A consolidation loan
- Credit counseling
- Debt settlement
- Or some other offering
Consider all of your options, including refinancing through balance transfers or loans, working with a nonprofit credit counselor, and negotiating directly with the lender or debt collector yourself.
Debt settlement companies, which may advertise themselves more generally as "debt adjusting" or "debt relief” companies, often claim they can negotiate debt reductions and offer to arrange settlements of your debts with lenders or debt collectors for a fee.
If a debt settlement company requires you to save up funds in an account:
- These funds still belong to you
- The account must be administered by an independent third party and be under your control
- You are entitled to withdraw funds held in that account at any time without penalty
Before agreeing to work with a debt settlement company, there are risks that you should consider.
- Many lenders will not negotiate with debt settlement companies. Also, many lenders and debt collectors will not negotiate how much they will settle for. Instead, they will have standard policies about how much loan principal they will forgive when you haven't made payments for a certain period of time. This means debt settlement companies usually can't get better terms than you could get by negotiating with your lenders and collectors yourself.
- Debt settlement companies cannot guarantee the amount of money or percentage of debt that you might save by using their services. They also can't guarantee how long the process will take. Beware of companies that say otherwise.
- Debt relief organizations cannot eliminate all of your debts; beware of programs that promise to make your debts “disappear.”
Beware of debt settlement companies that charge up-front fees in return for promising to settle your debts. Debt settlement companies can’t legally collect a fee before they actually settle or otherwise resolve your debt.
You should also be aware of the risks of stopping payments to your lenders. The risks include:
- You will likely damage your credit
- You may face collection efforts, additional late fees, and penalty interest charges
- These additional fees and charges will cause your debts to grow larger, so that debt settlement may cause your overall total debt-load to grow, even if the debt settlement company settles one or more of your debts
- You might be sued
If you are considering debt settlement, make sure you carefully read your contract before you sign so you know how fees are determined and how the program works.
Be wary of scams
Scammers seek to take advantage of consumers who are in distress. If the program seems too “good to be true,” it’s likely a scam. Avoid any debt relief or settlement organization that:
- Charges any fees before it settles your debts. Upfront fees are a major red flag for debt relief services, unless it’s a non-profit credit counseling program entering you into a program like a debt management plan
- Claims that it will help you take advantage of “new government programs"
- Makes guarantees that it can make your debt go away
- Doesn’t explain the consequences of entering the program
- Won’t send you free information about services without requiring you to provide personal financial information
Also, be wary of “bait and switch” sales tactics, such as a “loan program” that requires you to enroll in a credit repair or debt settlement program first.
Consider legal representation or bankruptcy
In some situations, you may want to seek legal representation. For example, you may want an attorney if:
- You are sued by a creditor
- You have assets you want to protect
- If you are on Social Security or other income that has certain protections from debt collection
There are a number of ways to find an experienced attorney. Before hiring an attorney, it is a good idea to make sure he or she is in good standing with the state bar association. You can also see if he or she has a disciplinary record. You can find this information by searching the attorney’s name on the state bar website where the attorney is licensed, or by calling the state bar association.
Some attorneys may also offer free services or charge a reduced fee. There may also be legal aid offices or legal clinics in your area that will offer their services for free if you meet certain criteria.
If you simply don't have enough income to pay what you owe, you may also consider filing for bankruptcy. Bankruptcy is designed to give you a fresh start while providing legal protections from most debt collection efforts. There are long term financial and legal consequences for bankruptcy, so you should consult a bankruptcy attorney to learn more. Other resources on bankruptcy can be found at the U.S. Department of Justice website: a and .
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