When you cannot pay: collections, foreclosure, and bankruptcy

You repay what you owe when you can. A debt that cannot be paid is also given a release in Israel’s law, and Jesus tells a story in Matthew 18:23-35 about a debt cancelled out of mercy. The one thing to remember: a minimum that does not cover the interest is not a way out. The official pages below are free, and they are worth reading before anyone offers to save you for a fee. The short biblical answer is is bankruptcy a sin?. The plan that comes first is getting out.

Teaching only, not legal advice. Foreclosure procedure depends on your state. A lawyer or a HUD-approved housing counselor is who can see your papers.

If a collector calls

The Consumer Financial Protection Bureau defines a debt collector as generally a person or company that regularly collects debts owed to others. They may be calling because a creditor believes you are past due, because a debt buyer has bought the debt, or to locate someone else.

The CFPB says a collector is generally required to give you the creditor’s name, the amount, and how to dispute it, either in that first contact or within five days. In some situations you have only 30 days after the contact to ask for certain information, and the CFPB says to ask for what you need even after that. If a collector cannot give you the basics, the same page says it could be a scam. The CFPB’s debt collection guide is the place to learn how to dispute a debt you do not recognize. When the month is short, bill triage shows which bills the model pays first. It is a model, not a court order.

A minimum that does not cover the interest

Here is the arithmetic of a debt that is getting worse while you “pay.” Most credit card minimums are set to cover at least the interest, so this happens more often with a private loan, a deferred plan, or a payment you set yourself. Take a $4,000 balance at 24% a year. The monthly rate is 0.24 / 12 = 0.02, so the first month’s interest is 4,000 × 0.02 = $80. A $40 minimum pays half of that interest and none of the balance. The new balance is 4,000 + 80 − 40 = $4,040. Next month the interest is a little higher, because it is charged on $4,040. The payment was real. The debt grew.

A minimum like that is not a plan. The payoff race will show how long a different payment takes, and if the numbers cannot close, the legal release below is the other door. Psalm 37:21 still names the person who borrows and does not repay. A payment that cannot shrink the balance is a sign the balance has outrun the income.

If the house is the debt

The CFPB describes foreclosure as the lender acting to satisfy the debt out of the sale of the house when payments stop. The process differs by state. Some states require a court (judicial foreclosure). Others proceed by a series of notices under a power-of-sale clause (non-judicial). On the Bureau’s timeline page: generally the legal foreclosure process cannot start until you are at least 120 days behind. After the servicer begins, the time until a sale varies by state. Its “how to avoid foreclosure” page adds that the servicer cannot make a first notice or filing until you are more than 120 days behind, and that a complete application for help, sent early enough, keeps the servicer from starting foreclosure while it evaluates you.

The CFPB lists these options a servicer might offer: refinance, a loan modification, a repayment plan, forbearance, a short sale, or a deed-in-lieu of foreclosure. None is automatic, and the words are in the glossary. Ask the servicer how each one would work for your loan before you agree to it.

Two instructions the CFPB repeats, and this page will not soften. Call the servicer, whose number is on the statement, and say whether the problem is temporary. And you should not have to pay anyone to help you avoid foreclosure; the CFPB lists an upfront fee as a scam warning sign. HUD-approved housing counselors can be reached at (800) 569-4287 (TTY 202-708-1455). HUD says foreclosure, eviction, and homeless counseling are always free. Other counseling may carry a fee, which must be disclosed first and waived if you cannot pay.

Bankruptcy, in the courts’ own words

The United States Courts describe two chapters ordinary households meet most often.

Chapter 7, in their words, provides for liquidation: the sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors. A court may dismiss a consumer case as an abuse of chapter 7, and above the state median income the Code applies a means test. Those dollar lines change. Read them on the courts’ chapter 7 page.

Chapter 13, in their words, allows a debtor to keep property and pay debts over time, usually three to five years. They also call it a wage earner’s plan. It can stop foreclosure proceedings and let past-due mortgage payments be cured over time. A plan may not run longer than five years. The details are on the courts’ chapter 13 page.

Under either chapter, an individual generally must receive credit counseling from an approved agency within 180 days before filing. The U.S. Trustee Program keeps the list of approved agencies.

The courts say Bankruptcy Basics is general information, not a step-by-step guide for filing, and not a substitute for a lawyer. This page stops where they stop.

Filing while you are able to pay, or borrowing in order to discharge it, is the thing Psalm 37:21 names. Filing because the debt is genuinely unpayable, after counsel, is where many readers see the room that Deuteronomy 15 and the mercy of the Matthew 18 parable leave. Christians weigh how far Israel’s release law carries into a modern court filing differently, and that disagreement is stated on the question page. Proverbs 15:22 is the method: more than one adviser, including someone who can see the papers. The theme is debt, borrowing, and surety.

Where to read more

The official pages are gathered on further reading. Videos on credit mechanics, titles checked and not embedded, are on the video shelf.

Try it yourself: open the interactive tool for this lesson.