FAQ: How to Pay Off Debt

My house is in danger of being foreclosed; should I cut my losses and sell my home?

If you know that foreclosure is coming and you cannot stop the process, then you'llmost likely be better off selling your home privately than letting the bank take it to auction. Generally, if you find someone that is willing to buy your home for at least the amount that you still owe on your mortgage, then you should take the offer. If the offer is for less than the amount of debt that is still owed, your bank has the option of blocking the sale. "Short sales" are another option where banks may let you sell your home for less than you owe and forgive the remaining balance, but these short sales are rare and you must often prove to the bank why you qualify.

I received a huge utility bill in the mail. Will the utility company make me pay it all at once?

Perhaps. But perhaps not. Depending on your location and circumstances, your utility company may allow you to average your utility bill out over the year. If your utility bills are higher in some months and lower in others, your utility company may allow you to flatten out your payments so you pay similar amounts each month. In addition, with current economic times, utility companies are also allowing those with small incomes to receive reduced rates on things like electricity, gas, water and sewage.

However, there are situations when you may have to pay off the entire utility bill. For example, if an unkown leak occurs where water runs continuously, you may be responsible for the large bill that shows up at the end of the month. Utility companies provide an item of commerce, and after that item passes through a meter at your home, you have "bought" it and will be charged, even if you didn't intend to use it.

I am in debt to a creditor. Can he or she place liens on my property, garnish my wages, seize my assets or take my tax refund?

In most situations, a creditor has to take you to court and obtain a judgment against you before garnishing your wages. Even if that happens, federal law prohibits the creditor from taking more than 25% of your wages, and you can even contest this, arguing that you cannot survive on only 75% of your earnings.

Depending on your creditor, however, there are three situations in which your wages can be garnished without a court proceeding. First, the IRS can garnish your wages without a court order, but you have a 30 day window in which to challenge the garnishment. Second, if you have student loans that are in default, the Department of Education can garnish up to 15% of your wages and a state agency can also garnish up to 10% of your wages. Lastly, if you have failed to pay alimony or child support, up to 50% of your wages may be garnished.

A creditor may also want to put a lien on your property or attempt to take money directly from your bank account. Apart from the IRS, most creditors must go through court and use law enforcement officers to take these actions. An unpaid contractor who has done work on your home may place a special lien – called a mechanic's lien - on your home without suing you first, however.

Finally, your tax refund is very hard to touch and cannot be taken unless the Department of Treasury receives a request from the IRS, Department of Education or a child support collection agency.

If I do not pay off all my debts, am I going to go to jail?

Most likely not. The United States did away with debtors' prison by 1850, and there are only a few circumstances where you may be jailed. That said, you may be jailed if:

• You are tried and convicted of willfully refusing to pay income taxes; or
• You refuse to comply with a court order, most of the time with respect to child care payments; or
• You have concealed, or are attempting to conceal, your property or your person in order to avoid paying a creditor that has a judgment against you.