I received a timely email from my sister forwarding an article that was very informative.  During these tough times,bill collectors  often make life more stressful and most people don’t know what bills they should pay and what the consequences are for not paying.

Should I pay the mortgage or the credit card bill?

http://www.abc2news.com/content/financialsurvival/yourmoney/story/financial-survival-mortgage-credit-card/ebrgG2WD3kKq-SyyNbwg6g.cspx?rss=702

By STEVE BUCCI
bankrate.com

Dear Debt Adviser,

I was recently diagnosed with a kidney failure that keeps me from working like I could before. I ended up borrowing money from my credit card to pay my mortgage to keep up with payments until I can’t pay both my credit card and the mortgage. I’m now behind on my mortgage. My credit cards kept on calling, and finally I settled for a lesser amount than what I owe them. My question is: Is it OK to use money from my 401(k) to pay off debt? I would like to get rid my credit cards; that’s why I agreed to the settlement. But at the same time, I’m thinking, “Where do I get the money?” Please help me. — April

Dear April,

No, no, no! Stop for a minute and take a breath. You have it backward and it’s not your fault. So before it is too late, let’s look at your situation with a fresh eye. First, my sympathies on your diagnosis and your personal financial problems as a result. You faced some tough decisions regarding your finances, and you are doing some things right. You are continuing to work as much as you are able, and you are trying to keep up the payment on your mortgage.

That you used cash advances to pay another debt is a recipe for disaster. It just cannot be maintained for any length of time due to high interest rates. I’m glad you wrote before you raided your retirement savings and continued doing things that may not be in your best interest, given the current economic environment and your personal situation.

Be forewarned, this response is hard advice for hard times. Do not settle with your credit card companies and do not touch your 401(k) money. Your credit card accounts are unsecured debt, meaning the creditor allowed you to borrow the money without any collateral to ensure that you would pay it back. Your mortgage is a secured loan backed by your home.

Because you need a roof over your head and the housing market is horrible for sellers right now, it might be best for you to do what you can to hold on to your home. That’s as long as you believe you can afford to make your mortgage payment to the exclusion of all other payments, but perhaps with the exception of the payment on your car, which you’ll need to get to work.

I’ll bet that the credit card collectors are calling you day and night. I’ll also bet your mortgage company is not. Why? Because the unsecured creditor needs to make so much noise in your life that you pay to get rid of them. The mortgage lender will just quietly take your house and put you out on the street.

Here’s what you should do. Stop making payments on your credit card accounts until you call the HOPE Now Alliance at (888) 995-HOPE. Ask a counselor to prepare a budget for you. It will show you what you can afford to pay on your mortgage and what you have left over for your credit card lenders. The Hope Now counselors can help you get better terms from your mortgage lender and give you a budget for living expenses and debt service. Plus, it’s all free.

I know it’s hard to think straight when someone is pressing you, and all your best instincts say to pay what you owe. But in your situation, you need to prioritize your debts and pay the important ones first. Save your retirement money, which is beyond the reach of collectors, and then do the best you can with what resources you have available. That’s all anyone can reasonably ask of you.

This advice is pretty good with the exception of the HOPE program. Only one person has been approved since the start of the failed program.  The best thing to do is just not pay your credit cards, let your house go 3 months late, and the lender will actually make a deal to avoid foreclosing on you that will possibly include lowering interest rates and reducing the principal (all without refinance fees).  Of course that just depends which lender you are dealing with and that you can substantiate your hard luck story (ie. loss of job, reduced income, over-extended, etc)

I blogged about this:

http://www.totalnoid.com/2009/04/16/foreclosures-will-continue-to-increase-and-economy-will-get-worse/

Under President Bush, a new homeowner rescue plan was put into place. It made about $340 BILLION available for loan modifications. The forecast was 400,000 people would be helped, but the result was only 1 homeowner saved.

CNN.Money:

In the five months since it has been in effect, HOPE has helped exactly one homeowner to avoid foreclosure. This despite Congress having made $300 billion available to back these loans and estimating that the program would benefit as many as 400,000 families.

“As it stands now, we’ve only gotten 752 applications,” said Federal Housing Authority spokesman Brian Sullivan. “And only insured one loan. Needless to say, the program isn’t working terribly well.”

As far as consequences, my sister had this copied in the email but I do not know the direct source. It is pretty accurate from what I know.

What if you don’t pay your credit card bills?

These are difficult times for our economy. Each one of us is feeling the pinch due to increased cost of living. It is getting very difficult to make ends meet. In difficult times like this it is very easy to amass a huge credit card debt. It can happen to anyone. Even to people who have been financially responsible. “Can I just don’t pay my credit card bills?” is the question many individual ask themselves and friends. This option is very much there. It also will give you some extra cash for few months ahead. But following are few of major problems you can get yourself into if you stop paying your credit card’s monthly payments.

Collection Calls

This is most scary part of Credit Card Game. Credit Card Companies will constantly call you and demand their money back. Collectors may call you 5 – 7 times a day. They will call you at home, They will call you at work and they will call you on your mobile phone too. There have been some reports that collection agents have been calling bosses, co-workers, and family members (which amounts to harassment and is not legal). They go to any length to get you on phone and when they get you on phone they use a lot of psychological techniques to lure you into giving them checking account numbers and other banking information. They will use every trick to make you pay. One of  the well known methods is that they intimidate and threaten you by telling you that they will take your house, car etc. Or they will bring police to your home. all this can be very stressful on some people. You will also start getting letters in the mail from them that may eventually turn more demanding.

Don’t get intimidated by them, Know your rights and report any violations to police and seek help. Most of the credit cards are unsecured so no one can take your car, house, furniture, etc. Worst thing these credit card companies can do is…  they can really damage your credit score.

Bad Credit Score

If you go 30 days past the due date on any of your credit cards, these credit card companies normally report this to Central Credit Bureaus so these missed payments are likely show up in your credit report and this has a terrible impact on the credit score. Companies, almost all of them will increase their interest rate and future loans may either be refused or available to you at very high costs.

A Bad Credit Score is not good. Anytime you apply for a job, home loan, school loan, car loan, car insurance, They do take a look at your credit score. If you are really in very bad crunch. consider bankruptcy as an option. After some time, usually 7 years, it’s all clean and neat again.

Excessive Interest Rate / Late Fees

Once you start missing your credit card payments, most of the credit card companies start charging “Default Rate”. That is normally highest possible interest rate, about 30%(Check the fine print on your credit card Application form or Disclosure on your Credit Card company’s  web site). They also start charging late fee penalties ranging between $20-60. if your balance exceeds the credit limit, which normally does, there will also be an over-limit fee which would be charged on daily basis.

I would recommend that you contact each of your credit card companies and ask to have your credit card account closed. This action will stop interest from accruing i.e multiplying. They will tell you that they can decrease your interest rate or they can allow you to make a very minimal monthly payment. some even offer a $3 per month payment plans but this is rarely more than a trap. You will only end up throwing money away as you will only be paying the interest payments and a debt will continue to grow. They will eventually close the account themselves anyway. So it is in your best interest that you do it yourself as it will save you some(depending on your balance $100 to $10,000) money at the end. Ask for a final bill from your credit card company and when you receive that then just try to pay a certain amount on each bill if possible but I recommend that  put them aside and concentrate on your mortgage and other liabilities like car payments, children education.

Once you start earning more income, you can either try to pay off the balances of the closed accounts little by little. If you can arrange some extra cash at the end you can also contact each credit card company directly and make them an offer to pay a certain percentage of the balance owed i.e 20% to 50% (think about your offer before you call them). If you choose to do this, stay firm on your offer and document everything. Do not send any payment to them until they send you something in writing that they will mark the account paid in full (keep all documentation and proof of payment).

Most Credit Card companies will accept this because they feel that something is better than nothing. They might also make a counter offer but stay firm and tell them that it’s all you can afford. If they say “No” than don’t worry and say “thank you very much” and move on to the next credit card company. It is  most likely they will call you up to accept the offer.

It is also a very good idea to consolidate your debt on one credit card account and then make minimum payments.

Legal Action

Eventually, if a credit card debt becomes very delinquent, Credit Card companies might take legal action course which can result in liens, garnished wages or any other legal judgements requiring you to pay your debt. However, credit card companies would normally try to avoid this situation because this is a very long, complicated and expensive process. But nevertheless, legal action does happen.

Just to debunk a myth, credit card companies generally do not freeze bank accounts. They would first need to have a court judgement against you. This whole process costs them money and it is rarely done by credit card companies. So, don’t worry, no body can put you behind bar, take away everything from you.. there is always help available. don’t worry.

Just on a side note, with the rising delinquency in every existing credit card portfolio, credit card companies will sue those who have attachable assets first as a priority (ie jobs, bank accounts, and real estate property that you are not underwater in). Since it does cost money to sue, the credit card companies will search first for suit-worthy customers who have the most potential to recover their money. Assets such as social security income, disability income, pensions, IRAs, 401Ks are not attachable and are considered judgment proof. That means even if they get a judgment against you, they can not recover their losses from these assets. This doesn’t necessarily mean they won’t sue you, but just like a tax audit your chances will vary upon your circumstances.