Most families usually have a budget in place, but even the best plans can sometimes fail. Sudden emergencies can create the need for huge expenses that you could not have accounted for. That can be anything, from an unexpected appliance repair to a sudden health scare.
During those situations, one can turn towards credit card bills and loans to cover the expenses when their own savings fall short and all of those balances can grow, which can put high pressure on their household budget.
Before you know it, you have multiple debts from five different sources that you are paying for while also covering the regular household expenses. Yes, unexpected circumstances can turn an entire budget on its head, but families can still overcome them with proper debt planning.
List every debt before you decide anything
The first thing that you should do is list all of your debts in one place. That can include both unsecured debt, like some loans that you and other family members owe, or credit card bills for different cards that you use for multiple purposes.
List all of them out, including:
- The outstanding balance that you are going to pay for each of them
- The interest for each of the cards and loans
- How much time you have left to clear each of them
- The due date and last paid date
- The minimum payment due for each
- The overall tenure that you have left to pay
- The name of the creditor or the company that is collecting the debt
- Whether the account is current or due
There are specialized online tools available that you can use to track everything comfortably or you can go down the more reliable manual route of using a physical notebook or Google Sheets to track everything down. Also keep track of dates of promotional offers ending on your cards or any fees that apply. Whenever new statements arrive, update this list consistently.
If you have medical bills and collection accounts, make a separate list to record those. These entries would require extra work.
Collection Accounts
Debt collectors usually give you a validation notice first, either on contact or within five days from it. In that notice, you would see information like the creditor’s name, the itemized amount, and the end date of the 30-day dispute period. This means that after receiving the notice, you would have 30 days to dispute the debt in writing.
If you do not recognize one of the collection accounts, send a written request for verification or ask for the name of the original creditor within that dispute window. The collector would have to pause collection attempts until it answers. Missing this window would limit your ability to use this right under the CFPB rules. So always make sure to check the amount and the creditor’s name against your own records before you pay anything.
Medical Bills
Sometimes there can be errors in the medical bill. So ask for an itemized statement from the provider or the collector. The statement will include all the information about all the services that you have used, what part of the bills is within your insurance coverage, and what you still owe.
A collector cannot demand you to pay for services that you have received and already paid for. After getting the itemized statement, you can lower the bill amount by negotiating with your provider or the collector. This is not a guaranteed way to reduce costs but worth checking.
Also, some healthcare providers offer hardship programs. Get information about that too, just in case you qualify.
Old Debts
If you have old debts, that’s an entirely different issue. Usually, even if you pay off a debt, it does not immediately disappear from records.
In some states, the statute of limitations (SOL) limits lawsuits on older debts. In most states, that’s usually around three to six years, but some states set the duration even longer. Talk to your attorney or financial advisor to know what’s applicable with your state.
In most of the states, the collector can still call and write after this period passes but they cannot sue or threaten to sue you. Doing that will violate the Fair Debt Collection Practices Act.
If you make any partial payment after the statute of limitations is over or give any kind of written acknowledgement that you still owe the debt, that can restart the clock. The court can still enter a judgment against you if you do not appear and raise the time limit as your defense. Because this rule varies across the states, I recommend consulting a lawyer in your state before you pay any old amount, so that you know what rules apply to you and your situation.
Build a budget your household can follow
The 50/30/20 split (needs, wants, savings and debt) is a fine rough check. For many families with high rent it simply won’t fit, and that’s okay. Don’t contort your budget to match a formula; build the budget that works for your specific household.
First and foremost, consider your take-home pay as the base when planning the budget. If you have a fixed income, that’s much easier to calculate. But let’s say you’re paid hourly, and the money is credited every two weeks. So in one pay cycle, you might receive $1,000. In the next $700, and after that $500, or again $800. If your income situation is something like this, you should base your fixed bills on a specific amount that you know will enter your account per month. Calculate around that amount. If you earn any overtime or bonus, treat that as extra money only after it arrives; don’t plan around it.
After you have finalized this, start listing all the essential costs for your household. These include things like the utilities that you need to pay, the basic groceries that you do require on average. If you require transportation for work, calculate how much that costs. If you have insurance payments, what is the due amount every month? List even the irregular costs that people tend to forget when planning a household budget, like school fees or your rent. Divide each by twelve so they don’t ambush you.
Then track, without making any changes, how much you naturally spend daily. This way your budget will reflect the real numbers for your household: what you actually spend and how much you spend per week. The CFPB recommends tracking spending for a short period, like a month, to properly see where the money goes.
Set priority list among your expenses
After calculating everything, make a total of all the essential bills that you usually have to pay every month. If the total amount is less than your income, that’s great. But in case it’s higher than whatever comes in per month, you need to decide on what your priority should be.
There are different levels of consequences for certain types of bills. For example, if you miss a car payment, that can lead to repossession, but if you miss rent, your family may face eviction. If you miss paying court-ordered obligations like child support, that can bring legal consequences. Consider all of those first to understand what is the most time-sensitive and prioritize those payments as non-negotiable.
Call your creditors if you miss a payment. Do it soon. Some creditors may waive a late fee or agree to a short-term arrangement, and many may move a due date if you ask.
Decide where extra repayment money goes
After you have finalized on the most important payments, the next decision that you must make is around the debt payments, or more specifically how much you can add towards your debt each month. The CFPB describes two basic methods.
You can try the debt avalanche method.
You pay more towards the debt with the highest interest rate, because it costs the most over time. For example, one credit card has a 30% interest rate, while another that you own has, like, 17%. Whenever you have extra money, pay more towards the card with the 30% interest rate, because over time you would end up paying more towards that just in interest. During this period, you can only pay the minimum amount for the other cards.
After clearing out the higher interest card, then tackle the next higher interest card and so on. This method can save you money over time, but the process is overall very slow.
The second option is the snowball method.
In this strategy, basically, you prioritize the smallest debt first. For example, let’s say you owe $400 towards one credit card, $1,800 on another card, $1,500 on a third card, and $3,000 on the fourth credit card.
Prioritize paying off the one with the smallest amount first. After you’ve cleared the $400 credit card bill on Card 1, you tackle the next card with the smallest debt (Card 3), clear that, and then the next. All this while, you’re still paying the minimum payment for each of the debts so that you don’t get charged a late fee for all of them. This method will allow you to see progress quickly, but you’re going to end up paying a lot more overall, because the cards with the higher rates would still accrue interest.
Both of these methods are useful, but they work best for specific types of users. So review both options carefully and pick one that you know you can consistently follow through with. Whichever you end up choosing, do not skip the required payment on the other debts. Bill-paying history is one of the factors credit-scoring models typically weigh. Set calendar reminders so due dates do not slip.
Keep new charges from erasing your progress
So far we have been focusing on what can be done to clear the debts that already exist. But if you add more on top of this, then the whole process is moot. New interest and fees can add up to a lot over time. I will explain this with a scenario.
Person 1 had a total outstanding household debt of $2,000. After months of slowly paying towards the debt, they managed to pay off $1,500 of it. They still have $500 more to go until completely debt-free. Meanwhile, another member of the family (Person 2) makes another purchase of $200. Interest and fees add up. Person 2 promises they can cover for it next month.
On the next due date, they do pay $400 towards the balance, but after some time, an emergency comes up, and they have to make another purchase of $250. Interest and fees again add up. This continues for months on end, and what would have cleared much sooner keeps on growing as more charges add up.
This is usually how many families fall into revolving debt even though, on paper, they are following every rule and contributing towards repaying their total owed amount.
- Take this seriously.
- Review everything you add into your accounts each month.
- If there are subscriptions you don’t use anymore or frequently, cancel them even if temporarily.
- Delay any purchases that you can do without.
- If groceries or utilities go on a card every month because income runs short, the budget has a gap.
- Fix the gap first. A repayment plan that ignores essential costs will not last.
Build emergency savings while you repay
If most of the income is going towards paying off debt and bills and there are no savings in place, any sudden expenses like the next medical bill or car repair would go into your credit card again. The CFPB notes that people without savings may rely on credit cards or loans, and that can make it much more difficult to pay off debt.
So start with an amount that you can afford to save every month. Calculate what each earning member can contribute according to their circumstances. Keep this money safe, easy to reach, and away from your daily spending. You can create a separate savings account for this.
In case you need to use it for a sudden emergency, make sure to refill that as your budget grows to cover for the next sudden cost and avoid using the card for it.
Get help when the payments do not fit
In case you are unable to make the payments, talk to your creditor immediately. The CFPB says that many credit card companies are willing to work with you on the payment if you face a financial emergency. You need to be ready to explain why you cannot pay the minimum and how much you can afford. Provide all the details honestly with all supporting documents. Mention you can restart regular payments, state the new payment amount that you are requesting, and for how long.
There’s no guarantee that the creditor will agree to the request, but being honest and upfront about it is better than nothing.
You should never ignore a lawsuit. Respond by the date in the court papers either by yourself or through a lawyer if a collector or creditor sues you. The court can enter a default judgment if they receive no reply from you, so avoid letting it get to that stage. A judgment can let a creditor garnish your wages. It can also allow a lien on your property or a freeze on funds in your bank account. Consult a lawyer to understand your rights under federal and state law.
One solution you can try is opting for a debt management plan or DMP. It’s different from a household repayment plan. You make one payment each month to a credit counseling organization, and it pays your creditors. Creditors may agree to lower interest charges or fees.
Most credit counseling organizations are nonprofits, but they may charge fees for some services. Before you enroll, ask what the organization charges, whether it will help you if you cannot afford its fees, and whether it will give you a written agreement. Avoid any organization that pushes a DMP as your only option before it studies your finances. Confirm with your creditors that they accepted the proposed plan before you send any payment to the counseling organization.
Be careful with for-profit debt settlement companies. A debt settlement company is not allowed to collect fees before it settles or resolves your debt. Other warning signs include a promise that your debt will go away, advice to stop talking to your creditors, and advice to stop making minimum payments.
Review the plan with your household each month
A household budget can work when all the members are coordinating around it well.
Set aside a monthly time with each of the adults in your family who are handling household money. Together, review upcoming bills, current balances, or any costs that your budget might have missed. If there was any payment that you did not account for or any spending that crossed the set budget, figure out the bottleneck. Plan for the next such situation accordingly.
Besides that, keep one folder with all the notices, statements, and letters. Keep a record of every payment and every call with the creditor. These records can really come in handy in case there is a lawsuit or dispute in the future.
As you pay off all the debts, decide where to target the contributions next. You can, after clearing the debt, dedicate it towards growing your emergency funds. In case of sudden lifestyle changes, like maybe a new job, or any changes in your income, review the current plan and make changes accordingly. Even keep a note of things like changes in who pays what bills. Handling all of this as a team can significantly help in managing household debt and building long-term financial stability.
Disclaimer:
This article provides general information. It is not legal advice about your situation. Also, the examples that are given here are to illustrate how specific methods work and not based on any individual case. Laws differ by state, so consult a licensed attorney about your case.
