Lacking the cash to pay your bills is a bad situation, but avoiding the problem is worse.

If money is scarce and bills are coming due, don't panic. Gather your statements and a calculator, and go into planning mode. Tackle the crisis as a whole rather than dealing with issues as they arise, which raises the risk of making poor financial decisions that could affect you for years to come. As you pull yourself together, keep these five crucial steps in mind:

Call the companies you owe: People faced with a budget shortfall will often try to avoid the companies they owe. They simply stop paying without giving a reason. But you should always call your creditors to alert them of your predicament. They might be willing to negotiate a compromise that would resolve the situation.

Prioritize your bills: One of the biggest mistakes people make when money is short is to try to be "fair" when paying their bills. If they can only afford to pay one bill, they pay one this month and a different one next month. It might seem like a logical solution, but they could hurt their credit scores and anger the companies they owe.

Some bills are more important than others. Prioritize your creditors and then pay them accordingly. Your mortgage lender should be at the top of the list.

Conserve cash if you can't pay your mortgage: When people realize they can't afford their mortgage, they often put those funds toward other bills. They should save that cash instead.

If you're falling behind and facing foreclosure, you'll need enough money to rent a new home. While foreclosures take months to complete, the previous owners usually have to move right away.

Know your rights: If you can't make deals with the companies you owe, expect calls from aggressive debt collectors. They're allowed to call people who owe, but they're not allowed to threaten debtors with violence, arrest or seizure of property. They're also prohibited from calling at odd hours or using obscene language. For more on the Fair Debt Collection Practices Act, visit the Federal Trade Commission's website.

Don't ignore the situation: People caught in a financial crisis face difficult choices, but they need make them. Delaying action will only make the problem worse and leave them with fewer options. Addressing the issue immediately prevents the kind of long-term damage that leads to financial ruin.
Jeffrey Strain has been a freelance personal finance writer for the past 10 years helping people save money and get their finances in order. He currently owns and runs SavingAdvice.com.

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