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Which Debts Should I Pay Off First?

If you are having serious financial problems, you probably are having trouble keeping current on all of your debts. You can only cut expenses so much, and your income cannot be stretched to cover all of your obligations. This leaves you with no choice but to delay or eliminate payment on certain of your debts.

One of the most important choices you will have to make is which debts to pay first. Your home or apartment, your utility service, your car, and even your household possessions may be at stake. Following the rules listed below may make the difference between keeping or losing this property.

Instead of delaying or eliminating certain debt repayments, you may be tempted to take out more debt to repay old debts. This is generally a bad idea.

Nevertheless, your main strategy in dealing with too much debt is deciding which debts to pay first, which you can refuse to pay, and which you can put off until later. The most important creditor to pay is not necessarily the creditor that screams the loudest or the most often. Creditors who yell the loudest often do so only because they have no better way to get their money than to pressure you to pay. Of more concern are creditors who not only threaten, but actually can take quick action against your residence, utility service, car, or other important assets.

You should direct your limited resources to what is most necessary for your family - - typically food, clothing, shelter and utility service. Unfortunately, there is no universally applicable list of the order in which debts should be paid. Everyone's situation will be different. Instead what follows are sixteen rules about how to set priorities.

Pay off creditors who can take the quickest action to hurt you, not those who are calling you the most often. Pay your mortgage or rent first; worry about credit card or doctor bills later.

Always Pay Family Necessities First. Usually this means food and essential medical expenses.

Next Pay Your Housing-Related Bills. Keep up your mortgage or rent payments if at all possible. If you own your home, real estate taxes and insurance must also be paid unless they are included in the monthly mortgage payment. Similarly, any condo fees or mobile home lot payments should be considered a high priority. Failure to pay these debts can lead to loss of your home.
If you are having very serious unresolvable financial problems which will require you to move to a cheaper residence, you might choose to stop paying the mortgage or rent on your existing residence. When you do so, you should not use that money to pay other debts, but rather save it as a fund to use for moving.

Pay What You Must to Keep Essential Utility Service. While this may not always require full payment (such as during winter moratorium on disconnections), whatever payments are necessary should be made if at all possible. Working hard to keep your house or apartment makes little sense if it is not livable because you have no utilities.

Pay Car Loans or Leases Next If You Really Need Your Car. If you need your car to get to work or for other essential transportation, you will usually make your car loan or lease payments next after food, housing costs, new medical expenses, utilities, and clothing. You may even want to pay your car loan first if the car is essential to holding onto your job.

If you do keep the car, stay current on your insurance payments as well. Otherwise the creditor may buy at your expense even more costly collision and theft insurance that gives you much less protection. In most states it is also illegal not to have automobile liability coverage. If you can do without your car or one of your cars, you not only save on car payments, but also on gasoline, repairs, insurance, and the like.

You Must Pay Child Support Debts. These debts will not go away and can result in very serious remedies - including prison for nonpayment.

Income Tax Debts Are Also High Priority. You must pay any income taxes you owe that are not automatically deducted from your wages, and you certainly must file your federal income tax return even in you cannot afford to pay any balance due. The government has many collection rights, particularly if you do not file your tax return, that are not available to other creditors. Remember, though, if you have lost income due to a change of circumstances, your tax obligations will also be reduced. Pay only what is necessary.

Loans Without Collateral Are Low Priority. Most credit card debts, attorney, doctor and hospital bills, and other debts to professionals, open accounts with merchants, and similar debts are low priority. You have not pledged any collateral for these loans, and there is rarely anything that these creditors can do to hurt you in the short term. Many won't bother to try to collect in the long term.

Loans With Only Household Goods Collateral Are Also Low Priority. Sometimes a creditor requires you to put some of your household goods up as collateral on a loan. You should generally treat this loan the same as an unsecured debt, that is as a low priority. Creditors rarely seize household because they have little market value, it is hard to seize them without court process, and it is time consuming and expensive to use a court process to seize them.

Do Not Move a Debt Up in Priority Because the Creditor Threatens Suit. Many threats to sue are not carried out. Even if the creditor does sue, it will take a while for the collector do be able to reach your property, and much of your property may be exempt from seizure. On the other hand, non-payment of rent, mortgage and car debts may result in immediate loss of your home or car.

Do Not Pay When You Have Good Legal Defenses to Repayment. Some examples of legal defenses are that goods purchased were defective, or that the creditor is asking for more money than it is entitled to. If you have a legal defense, you should obtain legal advice to determine whether your defense will succeed. In evaluating these options, remember that it is especially dangerous to withhold mortgage or rent payments without legal advice. However, for all debts you should consider fighting back when you have a valid defense.

Court Judgments Against You Move Debt Up in Priority, But Often Less Than You Think. After a collector obtains a court judgment, that debt often should move up in priority, because the creditor can enforce that judgment by asking the court to seize certain of your property, wages, and bank accounts. Nevertheless, how serious a threat this really is will depend on your state's law, the value of your property, and your income. It may be that all your property and wages are protected under state law. Then you should pay this debt only after more pressing obligations.

Student Loans Are Medium Priority Debts. They should generally be paid ahead of low priority debts, but after top priority debts. Most student loans are backed by the United States and federal law provides special collection remedies against you, such as seizure of your tax refunds and denying you new student loans and grants that are not available for other types of loans.

Debt Collection Efforts Should Never Move Up a Debt's Priority. Be polite to the collector, but make your own choices about which debts to pay based on what is best for your family. Debt collectors are unlikely to give you good advice. Debt collectors may be most aggressive to get you to pay debts which you should actually pay last. You can easily stop debt collection contacts and you have legal remedies to deal with collection harassment.

Threats to Ruin Your Credit Record Should Never Move Up a Debt's Priority. In many cases, when a collector threatens to report your delinquency to a credit bureau, the creditor has already provided the credit bureau with the exact status of the delinquency. And, if the creditor has not done so, a collector hired by the creditor is very unlikely to do so. In fact, your mortgage lender, your car creditor, and other big creditors are much more likely to report your delinquency (without any threat) than is a debt collector that threatens you about your credit record.

Cosigned Debts Should Be Treated Like Your Other Debts. If you have put up your home or car as collateral on a loan you have cosigned, that is a high priority debt for you if the other co-signers are not keeping the debt current. If you have not put up such collateral, treat cosigned debts as a lower priority. If others have cosigned for you and you are unable to pay the debt, you should tell your cosigner about your financial problems so that he or she can decide what to do about that debt.

Refinancing Is Rarely the Answer. You should always be careful about refinancing. It can be very expensive and it can give creditors more opportunities to seize your important assets. A short term fix can lead to long term problems.

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What To Do When You Can’t Make Your Rent, Mortgage Or Utilities 

1. Don’t Panic. Before your payment is due, find out exactly how short you’ll be. Allow for food, essential medicines, gas, transportation, etc.
    
2. Prioritize your debt. For example, it’s better to miss a credit card payment than to miss a rent payment. Call your non-essential creditors to get some type of payment plan or deferment.   It may be that your lender will let you reset your payment date so you have an extra week or two to make the payment. See Also The Credit Card Balancing Game.
    
3. Before the payment is due, contact your bank, landlord or utilities company. Never wait until you’re delinquent.  Being upfront speaks volumes of your character. It also shows you’re not a deadbeat and are trying in good faith to resolve the problem. In almost every case this will not accelerate the eviction, foreclosure or cutoff process.
    
4. Ask what the specific penalties are for late payments and the deadline for receiving late payments. Make sure to go in person and be very humble and polite with them. Explain the problem, the amount you’re short by and when and how you will try to get the money.  For example: “Landlord, as you know, for the last three years I’ve always paid my rent on time.  Unfortunately I’m unemployed right now and have two children to take care of. I know you have a job to do and that it looks bad if you can’t collect the rent from me. I want you to know upfront that I’m doing whatever I can so you won’t be in a tough spot here.  Right now I’m $500 short on rent. Tomorrow, I will ask my sister to wire me some money. I will also ask my church/synagogue/mosque for assistance.
   
   On Monday I will contacting the following help agencies “X, Y and Z” (see step 6), which are known to assist those who can’t pay their rent/mortgage or utilities. I will call you within _____# of days to inform you of my progress. Also, I am getting a roommate, applying for temp jobs, welfare, etc., and will do everything in my power so this won’t happen next month”
    
5. Ask them if they can make some type of accommodation for you. For example: banks and car loan lenders may allow you to miss a payment and tack the extra payment to the back end of your loan. Credit card companies may change the date the statement is due. Your utilities company may also have a “late payment plan”. Likewise, it’s possible your landlord may waive the “late payment fee” if rent is received within a week or so of the “past due date.”
    
6. Call The Rent, Mortgage or Utility Help Agencies. Write down the name of the agency, the person you spoke with, the date of the call and what they told you. This will help your credibility when dealing with your landlord and other help agencies. Often, the agency will ask what the other agencies are willing to commit to in assistance. The reason is that they’re wasting their money on you if no one else commits and you’re thrown out into the street.   So if you have other financing, tell them. Also ask them “if I could get all the other funding, what is the maximum you’d be willing to commit to?”  If they’re unwilling to give you a specific dollar amount, tell them “Look, every agency is waiting for the others to commit. The bottom line is that if you don’t commit to a specific dollar amount, no one else will either and I’ll be out on the street! Please, just give me a ballpark figure, so I can tell the other agencies.  I promise I’ll make every effort to look for other sources so you won’t be needlessly burdened” Note: you may need to get a late notice from your utilities/landlord or bank before they will help you.
    

6. Repeat process with all friends, relatives and help agencies.
    

7. Still Short? Find out by how much and then tell each of your assistance groups that if they give just x dollars more, your problem will be solved.
    
8. Still Short? For immediate cash pawn your TV, jewelry, silverware and other non-necessities. Pawnshops charge ludicrous interest rates. (300%).  But it's quick, instant cash and you can always pay them off and redeem your stuff later.  Remember, the goal here is to keep you and your
   stuff from being tossed out in the street. See also Creative Ways To Earn Extra Money.
    
9. Still can’t get the money? See Evictions, Avoiding Foreclosure and Free or Low Cost Lawyers
    
10. To avoid this next month, get a roommate, cut down on movies, eating out, and other non-essential expenses. Call your home and auto insurers to raise your deductibles so you can get reduced monthly payments. Call your phone company and ask for the best plan for your needs.  Then ask your credit card company for a lower interest rate (often they'll drop it a few points just by asking).
    Bag your lunch and sell any items you absolutely don't need. Also look for temporary work or a part time job on evenings, nights or weekends. And seriously consider moving to a less expensive place. If you have to, move in with mom or a relative until you get your head together. See also Creative Ways To Earn Extra Money and Credit Counseling.
     
11. Seek emotional support from friends, family, networking groups, churches, synagogues and counselors. You'll need it!

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