Money & Debt

Budgeting

Start by writing down what you expect to spend on your expenses each month. Look at your bank and credit card statements or other spending records. Figure out your fixed expenses: what you have been paying for areas like rent, utilities, transportation, and clothes. This tool from the Consumer Financial Protection Bureau may help.

Avoid predatory lending

Payday loans, title loans, and other predatory financial products target people in financial distress. These products often have high fees and can trap borrowers in a cycle of debt.

Before agreeing to a high-interest loan, explore alternatives. Loans with more than 36% interest may be illegal. Borrow from a credit union, use a low-interest credit card, or seek assistance from local charities.

Don’t pay with protected funds

Social Security benefits, disability benefits, and retirement savings are legally protected from debt collection. Avoid using these funds to pay off debts that are in collection. The creditor (the person or company to whom you owe money) will never be able to access them unless you use them to pay a debt. Keep exempt funds in a separate account to maintain their protected status.

Prioritize debts

When you have multiple debts, focus on urgent and serious risks. You know your situation best, but here are some key considerations:

Highest priority

• Civil court judgment debt is urgent because the creditor can use a judgment to seize your wages, bank accounts, or property.
• Criminal justice debt is urgent because non-payment can lead to losing your driver’s license, assets, or even your freedom.
• Child support and spousal support debt is urgent because it can lead to severe penalties and your property may be seized immediately.
• Rent payments are urgent because non-payment can result in eviction.
• Utility bills are urgent to keep essential services like electricity and water.
• Automobile loans or leases may be urgent because missed payments allow the creditor to repossess your car, potentially leaving you without transportation.

High priority

• Federal student loans become urgent after nine months of non-payment because tax refunds, federal benefits, and wages can be seized.
• Taxes owed to the IRS become urgent because the IRS can seize your bank accounts, income, and even your home if unpaid.
• Home mortgage delinquencies become urgent after a few missed payments because prolonged delinquency can lead to a foreclosure lawsuit, which may result in the sale of your home to pay off the loan.
• Unpaid real estate taxes become urgent because they can lead to your home being sold in a tax sale.

Lower priority

• Medical debt shouldn’t appear on your credit reports and is not urgent because it takes time before you can be sued.
• Credit card debt is not urgent unless you are sued, as property loss only happens after a court judgment.
• Private student loans are less urgent because private lenders don’t have the government’s special collection powers.
• Leftover debt after a car repossession is less urgent because you have already lost the car and the lender has to sue you to collect any remaining balance.
• Installment and personal loans are not urgent because you can only lose property if you are sued and a judgment is entered against you.
• Small loans with household goods as collateral are not urgent because creditors rarely seize such low-value items and usually go to court to seek a judgment.
• Debt owed to friends and relatives is not urgent because it does not harm your credit or property unless a lawsuit is filed and a judgment is entered against you.

Communicate with creditors

If you’re struggling to pay, contact your creditors. Ask about possible payment arrangements or hardship programs. If you contact them early, you may get better repayment options.

Create a debt repayment plan

While continuing to make your minimum payments, you may find it helpful to plan for repaying your debts using one of these methods:

• The Avalanche method is where you make more than the minimum payment, even if it’s only $5 a month, on your card with the highest interest rate. Make minimum payments on all the others. Once you pay off the card with the highest interest rate, apply the extra amount to your next highest interest rate credit card, until you pay that one off. Continue doing this until all credit cards are repaid.
• The Snowball method is similar to the Avalanche method. Instead of making extra payments on your card with the highest interest rate, you pay extra on the card with the smallest balance first.
• Other options:
  • A 0% interest balance transfer with predictable fees, but beware high retroactive interest and fees if you miss a payment.
  • Negotiate with your credit card company to see if they can give you a better repayment plan.

If you do nothing, you may be sued for a debt and have a judgment entered against you.

Old debts

Some debts might be so old that they're legally unenforceable. This means you can no longer be sued for that debt unless you make a new payment. Making a new payment on a very old debt can restart the clock and give the creditor more time to sue you.

For example, old credit card debts can only be enforced for 5 years after your last payment. Most written contracts can be enforced for 10 years after your last payment. Credit cards are not legally considered written contracts in Illinois. Read more at the Consumer Financial Protection Bureau about old debt.

Debt settlement and credit repair scams

Be wary of these services. Many of these companies and law firms provide services that you can do for yourself. Some creditors don’t work with debt settlement companies at all. You can negotiate directly with credit card companies.

Start with a non-profit agency accredited by the National Foundation for Credit Counseling (NFCC).  Accredited non-profits provide more reliable support than for-profit debt settlement services.

In Illinois, debt settlement and credit repair companies should only charge you 15% of any amount that they save you. Watch out for law firms or other providers that want to charge you more.

Where can I find financial coaching and counseling services?

Many reputable credit counseling agencies are non-profit organizations. Check if the service is accredited by the NFCC or the Financial Counseling Association of America (FCAA). Learn more at the Consumer Financial Protection Bureau about credit counseling and debt settlement companies.

Before you work with a debt counseling service, check with the Better Business Bureau. If you see a lot of complaints about a company, that can be a warning sign.

To make sure the service is operating lawfully in Illinois, check with the Secretary of State and the Department of Financial Institutions. You may find the Federal Trade Commission’s guide on choosing a credit counselor helpful.

Can others be liable for my debts?

Only the people involved in an agreement are liable for the debt. This doesn't stop companies from trying to collect debts from people who aren't liable. Find out the details before paying a debt.

For instance, if you take out a loan, only you and the lender are bound by that contract. Others aren’t liable unless they cosign or guarantee your debt, or enter into a new agreement to repay your debt. Authorized users on credit cards aren't responsible for the debt unless they sign an agreement to be liable.

People don’t usually inherit debt when a person dies. If you help someone pay their bills, you aren't liable for their debts if they die. The executor or administrator who handles the decedent’s estate may have to pay the dead person’s debts from the money in the estate.

The only true exception is between spouses under the Family Expense Act. One spouse can be liable for the other's debts for family expenses. This does not apply to money loans, and it usually does not apply to credit cards. Family expenses include medical bills, funeral bills, clothing, jewelry, rent for the family home, carpeting for the family home, and child care.

What does it mean when a debt is “charged off?”

When a debt is "charged off," it’s an accounting move that shifts the debt from the company’s accounts receivable to bad debt. This affects the creditor’s financial records, but does not erase your obligation to pay. You are still legally responsible for the debt.

Learn more about what to do if your debt goes into collections.

Consider bankruptcy

Bankruptcy is a legal process that lets you get rid of debts, stop creditor harassment, and start over financially. Learn more about bankruptcy.