In today's economy, things are rapidly becoming very hard for folks who can't afford their mortgage. They are strapped and are finding it so difficult that they are living on credit cards and eventually of course these run out.

If I am describing your situation, read on. We are going to find out if and when you should avoid people to whom you owe money, and in what situations you should answer their call and maintain contact.

One personal note. I am not moralizing here. I am here to give you the straight skinny you won't hear from a lot of other places.

*You* must make up your mind what you can do and what is right in your case.

The fact is that some people have been victimized by unscrupulous mortgage brokers, or have let themselves get talked into a situation that is not to anyone's advantage. Now we talk about what can be done.

The realities rather than the theory. And you will do what's right for you and your own moral compass, okay?

Okay. So...

There are three types of debts. One is to someone you must at all costs maintain services from. For instance, your electric company. You have to deal with them, make payment arrangements, whatever it takes so they don't shut you off and you don't end up in complete darkness. Hey, candles cost money too!

The second type of debt is debt to someone who holds no sway over you. They hold no security. And you are toast with them as far as getting new credit anyway. So if you stop paying them, the sky isn't going to fall. They may call you and mail letters to you, and they may (eventually) sue you, but nothing other than that is going to happen if you don't pay them.

These are called unsecured debts.

The third type of debt is secured, debts like auto loans and mortgage payments. If you don't pay these, the lenders will come and take your car away or they will take your house away.

There is a process these secured creditors have to go through. It's the foreclosure process. For a car loan, it can be a simple snap to take your car. If it's a house foreclosure, there is typically a notice of default filed first, and then some months go by during which you can continue to live in the house whether you are making payments or not.

If you are in a lot of debt, and you haven't made a house payment for awhile, your mortgage lender will stop accepting payments from you at all. They want to be completely caught up first.

Your foreclosure options

Now you have three options.

1. You can work things out with your mortgage company.

2. Or you can sell your house.

3. Or you can continue living there and not making the payments.

If you work things out with your mortgage company, they will require that you make a formal workout agreement with them. They will want usually a "good faith down payment" on the arrears that you have built up. And they will insist that you start making regular payments...regularly.

If you sell your house, you have to watch out. You don't want to sell to someone without making sure your mortgage lender is paid off first, if at all possible. Short of that, if you sell, you want to make sure the buyer is honest and that you don't mind the buyer taking your property "subject to" your existing loan.

Your credit could be worse if the buyer doesn't pay your mortgage. In some states, your lender can come after you for a deficiency judgment. These are dischargable in bankruptcy, but who wants to have a bankruptcy?

Sometimes your third option is best. Instead of paying your mortgage, you build up a nestegg so you can move to a rented place that you can afford, and you are prepared to offer a prospective landlord six months rent as a deposit, since you have poor credit.

It is even quite possible for you to turn things around to the point where you can buy another house, with little or no down payment, and no qualifying. Hopefully one you can afford. Neat trick and one that thousands of people in the know will take advantage of.

Renting is cool, but you don't get a deduction like you do when you are a homeowner. Actually, renting is very cool right now as homeowners are seeing their equity plummet. But my point is that there is plenty of life after foreclosure, and that sometimes it is best to simply move on.

So now, back to the original question. Who should you deal with and who should you avoid?

Creditors: who to deal with and who to avoid

1. It may pay to avoid credit card companies and other unsecured creditors that you can't really do business with again (for awhile) anyway. You can drop out of site, stop responding to phone calls and letters. Eventually most of these go away. At some point you can make a payment agreement with them and condition it on their saying nice things about you to the credit bureaus. But not right now.

2. You may want to talk to your mortgage lender about a workout agreement. Mortgage lenders are doing all sorts of things to avoid foreclosure, including playing with interest rates, increasing the time you have left to pay on the loan, and other things. So this is a great option to explore unless you owe more than your home is worth. And in that case you want to do a short sale if at all possible to avoid a foreclosure on your credit record and get out from under.

3. Continue making the payments and working things out with your electric company. Hey, they hold all the cards!