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When you have debts you can't afford to pay, your options for dealing with them are limited. Unfortunately, once you fall behind on payments, your choices narrow even further. Timing is a critical factor when you are burdened with debt. The earlier you can sit down and concentrate on your debts and available cash flow, the better.

Before you react to your financial situation, take a deep breath, take stock of your finances, and make time to get informed about what steps to take to manage your situation.

In today's tough economy, lenders (especially credit card issuers) offer a variety of payment plans to help you get back on track. Whether they work with you is often based on how far behind you are with your payments. Sometimes your best option will be to work with your creditor and come to an arrangement before your account hits charge-off status.

When debt gets charged off

"Charge-off" is a term used to describe an accounting function followed by lenders. Charging off a debt means the lender is no longer expecting to get paid what you owe. The accounting function of a charge-off essentially means moving your balance from the asset column (where it was while you were making timely payments) to the loss column. Traditionally, lenders, especially consumer credit card issuers, must account for losses by no more than 180 days of consecutive nonpayment.

The earlier you work to resolve, the better your options

Your ability to work out payment arrangements early with your lender, and before your account gets charged off, can often bring you better results.

Two early options that may allow you to better manage your debt:

  • Hardship repayment plans. Many banks offer lower monthly repayment plans (both temporary and longer term) directly to account holders who have fallen behind. These repayment plans are not offered when you are current with payments.
  • Consumer credit counseling. Debt management plans available through a credit counselor can provide a way to lower your bills and consolidate your unsecured debts into one monthly payment.

Hardship payment plans and credit-counseling services are good options to reduce your bills if you have the monthly cash flow to work with. You can expect to pay roughly 2% of the balance you owe as your new, lower payment.

Make arrangements before your account charges off

Christopher Viale, the president of Cambridge Credit Counseling, points out some of the benefits available to you when working with a credit counselor to repay unsecured debts:

  • Missed credit card payments are reflected in your credit report. If your accounts are not yet charged off by your lender and you are able to enroll in credit counseling, some types of accounts can be "re-aged." This means that your accounts are made current and will not show late payments in perpetuity. Most large credit card lenders offer this courtesy if your account qualifies.
  • Missing payments typically mean that late fees, and possibly over-limit fees, are adding up. Credit counseling stops these fees from being added on a forward basis.
  • Missing payments leads to your interest rates going up. Default interest rates can be higher than 30%. Credit-counseling agencies are able to get the high interest charges stopped and can get interest rates reduced on average to 8%.

Once an account is charged off, it cannot be re-aged. Added fees and penalties are now part of the balance owed and are seldom waived.

Get informed, make a plan, take action

Falling behind with payments to creditors is stressful. The stress is often compounded by the calls and letters you get from creditors soon after you miss your first bill. Those frequent reminders that you have fallen behind are designed to get you back on track with a payment, but the calls can also be a source of daily frustration. If things are too tight financially, it is sometimes easy to ignore the calls and letters.

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If your accounts are not yet four to six months behind, consider the following:

  • If you have a dependable source of income, figure out if you can commit to a lower monthly payment that amounts to 2% of your combined unsecured debt. If your monthly cash flow will support this payment, contact each of your creditors directly and ask if they have payment plans available. Ask about your eligibility to enroll in a hardship repayment plan. You can learn more about credit card hardship repayment plans through the Consumer Recovery Network's free online debt relief system.
  • You can contact a nonprofit company, such as Cambridge Credit Counseling, that will assist you with lowering your payments, consolidating your bills into one payment and stopping the collection calls.

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