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When Your Income Drops
In today's economy, many circumstances can lead to a sudden loss of income: loss of job, layoffs or
cutbacks, reduced income, loss of support from a spouse, illness, death of a spouse, or divorce. Any of
these can be a serious blow to families who are struggling to survive economically in difficult times.
Very often the reduction in a family's income is not expected, and the natural reaction is panic. If your
family suffers loss of income, try to remain calm and don't waste time and energy blaming yourself.
Instead, take control of the situation by doing the best you can with the resources available to your
family.
Take Stock of Your Situation
Uncertainty and financial neglect can increase the stress associated with income loss. Take some time,
therefore, to study your current financial and family resources.
Once you know and understand your situation, you can develop a plan for making the most of family and
community resources. A little knowledge goes much further than either imagining the worst or ignoring
reality and neglecting bills.
Family Resources
Begin by listing the incomes of all earners in the household. How long can you depend on those
incomes? Are there other family members who are potential income earners, if only for this period of
financial instability? When income is uncertain, it is better to err on the conservative side in your
estimates. You may wish to make a few different projections of expected income--low, medium, and
high.
Next, calculate the current market value of each item you own. Use today's value (what you could sell it
for), not what you paid for it. Look at everything you own with the idea that its market value might help
pay your bills for awhile. Be realistic, however, in assessing what items you would be willing to part with.
Also, consider any funds which you have in reserve, such as savings or life insurance cash value.
Make a list of your family's nonfinancial resources that can be used to cut costs, traded for needed
goods and services, or used to produce income. It is likely that each family member can contribute in
some way to running the household more economically. Be imaginative in assessing all of your
resources and how they can best be used in hard economic times.
Family Financial Obligations
Once you've listed your family's resources and potential resources, consider your expenses. Expenses
can be divided into those that are fixed, at least in the short term, and those that are variable or flexible.
Fixed expenses, or debts, are those for which your family is obligated to pay a set amount. Examples of
fixed expenses are mortgage or rent payments, consumer or automobile loans, and charge cards. List
all of your fixed expenses by answering the following questions for each:
Who is the creditor? (Record name, address, and telephone number.)
What is the balance due?
What is the interest rate?
What is your payment?
How often and when is your payment due?
Are you behind in payments? How much?
Has the creditor started any action against you?
Next, calculate your family's monthly flexible expenses. Flexible expenses are harder to estimate, so use
checkbooks or cancelled receipts to gain an accurate accounting of these expenses. Be realistic about
which items are actual needs and which items can be reduced or eliminated.
Reorganize Family Spending
A reduction or loss of income usually forces a family to alter spending patterns. While this is painful at
best, the pain can be minimized if family members communicate openly and if the family works out and
follows a spending plan.
While dollars are scarce, their value, in effect, grows. No longer can the family afford to "waste" money
on luxurious, frivolous, or unnecessary items. It is important, then, that family members agree on which
goods and services are high priority, which are less important, and which can be postponed or replaced
by less expensive substitutes until finances improve.
When your family begins to see what income is available and how money is being spent, it is time for a
family conference. Lay out the records of anticipated monthly income and scaled-down expenses for all
family members to see and evaluate. Subtract expenses from income: Is the remainder positive or
negative after all monthly fixed and flexible expenses are subtracted from monthly income? Are
expenses out of line with expected income? Where can cuts be made so they cause the least sacrifice
in family welfare? It's easier to see the general pattern of spending if expenses are categorized. This
reveals the percentage of income spent on food, housing, clothing, medical care, insurance, and other
items. There are no hard-and-fast rules for family spending because individual needs, goals, and
circumstances vary. However, examining spending by category will highlight potential differences
between your family's stated goals and priorities and your actual spending patterns and income. If
these differences are significant, you need to reach agreement on a plan for changing the way income
is allocated.
If your family is operating "in the red," a couple of things must happen: expenses must be reduced,
income must increase, or both.
Set Priorities for Spending
Some expenses are more important than others. Putting your bills in a stack and paying them until the
money runs out won't work. You may not have enough money to pay all your expenses, but you must get
the most out of what you do have. Set priorities for your spending to make sure you meet the health and
welfare needs of family members and minimize the legal and economic risks of not paying some bills.
Obviously, food and shelter for your family should be the first priority with the income you
have available. After those two are taken care of, hard choices may need to be made on which bills
you must pay first. The following list provides an example of how you might rank creditors according to
the degree of risk involved in nonpayment:
Second Priority--Utilities, insurance, automobile loan.
Third Priority--Credit cards and outstanding debts, finance companies, credit union, and other
loans.
Fourth Priority--Doctors, dentists, hospital, and retailers.
Contact all of your creditors before your bills are due, explain your situation, and offer to negotiate new
repayment terms. If a creditor agrees to new repayment terms, uphold your responsibility by meeting the
terms you agreed to. If any changes occur that affect your repayment plan, contact your creditors
immediately.
Negotiate Your Payments
Mortgage Payments. Most lending institutions are willing to work with homeowners who have
mortgage payment difficulties. Generally, a lender does not want to foreclose on a mortgage because
time and money may be lost in selling the property at public auction. Small, locally controlled community
lenders can sometimes be more flexible in negotiating new short term payment plans than larger or
nonlocal lenders. But be realistic. Eventually the lender will require full payment or will take legal action.
If you can't make full payments, act immediately before the first payment is missed. Call the mortgage
company and speak to someone in the mortgage servicing department. Identify yourself by the loan
number, and then explain your situation. Propose a plan, such as a deferred or partial payment plan. If
your plan is rejected, ask what your options are and what you should do next. These questions are
difficult to ask, but the information is absolutely essential for your next decision.
You may want to seek neutral advice regarding repayment alternatives and the consequences of each.
Considerations include these:
Extend the loan
Refinance
Sell, even if the market is depressed and a prepayment penalty is imposed
Voluntarily surrender to the lender (deed in lieu of foreclosure) or
File for bankruptcy.
The consequences of each alternative can be positive or negative and may vary from person to person.
You may have to choose an option based on the least negative consequences.
Consider first your options for extending your loan or refinancing. Deciding whether to sell your home
should be done fairly early to ensure that the equity is not used up with the interest. While the decision to
sell may be difficult, the speed with which that decision is made could be the difference in cash-in-hand
versus no cash from the sale.
Voluntary surrender (a deed in lieu of foreclosure) means that you voluntarily turn over your house to the
lender in consideration for the cancellation of the debt. This is an option to consider if foreclosure
seems inevitable. People choosing this alternative usually --
Have little equity in the house.
Want to avoid the costs of foreclosure and having the information placed in their credit records.
Have another alternative for housing. Your lender may, but is not required to, make arrangements
to rent you the same house.
Avoid foreclosure if possible. A mortgage is delinquent on the date specified in the mortgage--usually
when a payment is 30 days overdue. Most mortgage holders begin foreclosing on the first mortgage
after the third month of delinquency. In areas of widespread unemployment, some local mortgage
holders may be willing to accept interest payments plus a small payment on the principal rather than
foreclose on a large number of homes in the community. Mortgage holders outside of the local area may
be less willing to extend mortgage repayment terms beyond the third month.
Utility Bills. If you are delinquent on your utility bills, most companies will notify you of their intention to
discontinue services. You will be given notice, allowing you at least a few days to pay your bill before
your service can be cut off.
If you can't make full payments on your utility bills, you should take these steps:
Notify the company immediately, before the due date and before fuel is needed. Explain the
reason for your inability to pay.
Propose a new payment plan based on your current ability to pay. If you don't have a plan or if
your plan is not acceptable, develop one with the company.
Check to see if you are eligible for any area assistance programs or ask your utility company
about assistance. Many agencies, churches, and other groups provide money for utility bills in
emergency situations.
Talk with family members and decide how you will safely reduce the use of your utilities and cut
your costs.
Telephone Bills. If you feel that you will have problems paying your telephone bill, contact the telephone
company before the bill is due. Depending on your prior record, and at the discretion of the company, a
payment plan may be set up where you will not have service interrupted.
If you receive written notice of termination of service, the telephone company will attempt to notify you
again (by telephone) at least two times before terminating your service. To get service again once it has
been disconnected, you may be required to: (1) pay the prior bill in full, (2) reapply for service and pay
installation charges, and (3) pay a large deposit.
You can reduce your telephone costs in several ways:
Analyze your service breakdown and eliminate custom calling features and unpublished listings.
These are often unnecessary and add to your costs.
Trade or remove enhanced telephone models from your home. Trimline and touch-tone models
are nearly three times as expensive to rent as standard rotary models.
Eliminate all unnecessary calls if you are in a measured service area.
Buy your phone. This may be less expensive than renting.
Insurance Payments. If you can't make an insurance payment, call or write your agent or the insurance
company. Explain your situation and ask them to consider a different payment plan. There may be some
leeway (10 to 30 days) in premium payment due dates. Check your policy and confirm with your
insurance company.
Determine your minimum needs for insurance. Check to see if a lower premium is possible through
taking the following actions:
Change to a monthly, quarterly, or semi-annual payment plan with the same coverage.
Change to more basic coverage as long as your needs are met.
If your car is older and paid for, consider dropping collision coverage or raising the deductible. Make
sure you are receiving any discounts offered by your company for eligible drivers.
Consider changing your life insurance policy to a less expensive type if that is appropriate for your
family's situation. Converting whole life to term insurance may be one option. Another is to use your
dividends to reduce your premiums.
Self-Help
Developing a Budget: The first step toward taking control of your financial situation is to do a realistic
assessment of how much money you take in and how much money you spend. Start by listing your
income from all sources. Then, list your "fixed" expenses — those that are the same each month — like
mortgage payments or rent, car payments, and insurance premiums. Next, list the expenses that vary —
like entertainment, recreation, and clothing. Writing down all your expenses, even those that seem
insignificant, is a helpful way to track your spending patterns, identify necessary expenses, and prioritize
the rest. The goal is to make sure you can make ends meet on the basics: housing, food, health care,
insurance, and education.
How to Develop a Budget
Find out where your money is going. Unless you're tracking your money, it's probably not going where
you really want it to.
TRY THIS: Write down your total monthly take-home pay. Then list your monthly expenses. At the end of
the month, subtract those expenses from your total pay.
Look for places to save.
Use this information to set a monthly budget that includes saving.
Review how things are going each month. TIP: Carry a small notebook. Write down everything you
spend. Include small things like candy bars.
Your public library and bookstores have information about budgeting and money management
techniques. In addition, computer software programs can be useful tools for developing and maintaining
a budget, balancing your checkbook, and creating plans to save money and pay down your debt.
Contacting Your Creditors: Contact your creditors immediately if you're having trouble making ends
meet. Tell them why it's difficult for you, and try to work out a modified payment plan that reduces your
payments to a more manageable level. Don't wait until your accounts have been turned over to a debt
collector. At that point, your creditors have given up on you.
Dealing with Debt Collectors: The Fair Debt Collection Practices Act is the federal law that dictates
how and when a debt collector may contact you. A debt collector may not call you before 8 a.m., after 9
p.m., or while you're at work if the collector knows that your employer doesn't approve of the calls.
Collectors may not harass you, lie, or use unfair practices when they try to collect a debt. And they must
honor a written request from you to stop further contact.
Managing Your Auto and Home Loans: Your debts can be unsecured or secured. Secured debts
usually are tied to an asset, like your car for a car loan, or your house for a mortgage. If you stop making
payments, lenders can repossess your car or foreclose on your house. Unsecured debts are not tied to
any asset, and include most credit card debt, bills for medical care, signature loans, and debts for other
types of services.
Most automobile financing agreements allow a creditor to repossess your car any time you're in default.
No notice is required. If your car is repossessed, you may have to pay the balance due on the loan, as
well as towing and storage costs, to get it back. If you can't do this, the creditor may sell the car. If you
see default approaching, you may be better off selling the car yourself and paying off the debt: You'll
avoid the added costs of repossession and a negative entry on your credit report.
If you fall behind on your mortgage, contact your lender immediately to avoid foreclosure. Most lenders
are willing to work with you if they believe you're acting in good faith and the situation is temporary.
Some lenders may reduce or suspend your payments for a short time. When you resume regular
payments, though, you may have to pay an additional amount toward the past due total. Other lenders
may agree to change the terms of the mortgage by extending the repayment period to reduce the
monthly debt. Ask whether additional fees would be assessed for these changes, and calculate how
much they total in the long term.
If you and your lender cannot work out a plan, contact a housing counseling agency. Some agencies
limit their counseling services to homeowners with FHA mortgages, but many offer free help to any
homeowner who's having trouble making mortgage payments. Call the local office of the Department of
Housing and Urban Development or the housing authority in your state, city, or county for help in finding
a legitimate housing counseling agency near you.
Conclusion
Coping with the stress and hardships of a reduced income is not an easy task for you or your family.
There are no easy answers or quick cures. Adapting and regrouping will be easier if you remember that
you are the same person as before--but with reduced cash flow. You can maintain control of your
situation during this period of financial change by reducing and prioritizing spending as much and as
quickly as possible. The step-by-step procedures outlined here will help you clarify your priorities, make
decisions, implement your plan, minimize your anxiety, and strengthen and prepare you and your family
for the future.
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