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This is not a lesson in how to be a deadbeat.

It's a lesson in how to do the least damage when you can't pay all of your bills.

Most stories about dealing with debt assume you have the money to pay most or all of your bills.

That's not always the case. Thanks to bad planning, bad decisions, bad luck or a combination of all three, sometimes you just don't have the scratch.

Yet filing for bankruptcy isn't always the solution.

If your bills aren't that monumental or your financial prospects are likely to improve, a Chapter 7 filing could be a major overreaction. You also may have a profound distaste for skipping out on your creditors -- even if you can't pay them just now.

It can be helpful, in those times, to understand how to create some breathing room for yourself so you can formulate a plan to get back on your feet while minimizing the long-term financial fallout.

Image: Liz Weston

Liz Weston

Unfortunately, many people in financial crisis simply stick their heads in the sand, refusing to admit the severity of the problem and ultimately making matters worse. They pay a credit-card bill when the mortgage is due, for example, simply because a collector is pressuring them, or they stop paying any of their bills because they can't pay them all.

Knowing which bills must be paid and which can wait -- and for how long -- is essential for your financial survival.

The essentials

Any late payment can hurt your credit score. The three-digit number lenders use to gauge your credit-worthiness is extremely sensitive to "lates," although generally you must fall at least 30 days behind for the delinquency to be reported to credit bureaus and to affect your score.

The later you are and the more accounts you have that are delinquent, the more devastated your score will be. The damage may persist for years, but it isn't permanent; as soon as you're back on your feet, you can begin repairing the mess.

Some late payments have much more drastic consequences than others. Miss a single rent payment, for example, and your landlord can start eviction proceedings that will have you on the street in a matter of weeks in most areas. Mortgage lenders (including home-equity lenders) and auto lenders have short fuses as well. Meanwhile, credit-card companies, medical providers and student-loan lenders typically wait months before taking collection actions.

Knowing the consequences can help you prioritize your bills. Your essential bills include your shelter (rent or mortgage), utilities (that's power, heat, water and one phone line, but not cable), food and anything that allows you to work, including car payments and child care. If you owe child support or taxes, those are typically must-pays as well.

Most other debts fall into the nonessential category that can be delayed, at least for a while.

 
Consequences of being late
DebtTime when real trouble startsFallout
Mortgage90 to 120 days lateForeclosure, loss of home
Auto loanOne day late (although many lenders wait 60 days)Repossession, loss of car, potential for collection of unpaid debt
Student loans270 days lateWage garnishment, tax-refund seizure
Credit cards180 days lateAccount "charged off," sent to collections
CollectionsDepends on amount, aggressiveness of collectorLawsuit, wage garnishment
Tax debtDepends on amount, aggressiveness of collectorWage garnishment, property or bank account seizure
Child supportDepends on amount, aggressiveness of collectorLawsuit, wage garnishment, jail

Coping with creditors

Mortgage lenders: If at all possible, keep up with your mortgage and home equity payments. If you don't pay, your lender can foreclose -- a process that can take as little as three months (although most lenders wait for you to miss two or three payments before starting foreclosure proceedings). The further along the foreclosure process gets, the more you'll have to cough up in fees and collection costs to get your house back.

Fortunately, many lenders have gotten a lot better about trying to help homeowners survive these rough times with various "workout" plans that lower or suspend payments for a few months. If your cash crunch will be short term, it makes a lot of sense to contact your lender as soon as you know you might miss a payment to request help.

If you have no idea when your financial prospects will improve and you're not underwater, selling your house is usually a better option than letting it fall into foreclosure. You'll keep more of your equity and protect your credit score from future damage.