Which Debts Should I Pay First?

What to do if you are unable to pay monthly expenses and debts

When you experience serious financial problems, you have trouble keeping up with payments on all of your debts. Expenses can only be reduced so much, and income only goes so far to cover all of your obligations. Many times, you are left with no choice but to delay or eliminate payments on certain debts.

You have a legal obligation to pay all of your bills. If you don’t pay your bills, your credit record will be negatively affected, and some creditors may decide to take court action to collect the money owed them. You can’t just put your bills in a random pile and pay them one at a time until your available money is gone, because the consequences of paying some bills and not paying others can cause serious problems. You have to base your payment system on the importance of each of the bills.

Prioritize Your Debts

Prioritizing your bills is critical to minimize legal and economic risks when you are in financial trouble. You must choose which bills must be paid to make sure the basic needs of your family are met.

The most important creditor to pay is not necessarily the one that calls the most often or mails you the most collection notices. Creditors like utility companies, mortgage holders, landlords, and automobile finance companies can actually hurt you the most quickly, because they can take the fastest action against you. Your family needs a roof over its head, electric, water and other utilities to survive, and transportation to get to work, so pay these creditors first. Worry about paying credit card and medical or doctor bills at a later time; even though these creditors will try to pressure you to pay them, they have no real leverage against you.

High Priority Debts

High priority debts are those creditors’ debts for which non-payment would result in the gravest consequences. Eviction from your home or apartment for non-payment of rent, repossession of your home for overdue mortgage payments, or disconnection of utilities like gas, water, or electric for outstanding balances would most severely affect your family. High priority debts may include:

• Mortgage or rent: You don’t want to lose your home. If it appears your financial difficulties will be long-term, you may have to consider selling or relocating.
• Utilities: Basic utilities like electric, gas, or water are essential, so you don’t want these disconnected.
• Car payments: If your car is repossessed, you won’t be able to get to and from work, which will only compound your financial problems. However, if you don't need your car to keep your job, you might want to consider selling it.
• Child support: If you don’t pay child support, you could go to jail.
• Unpaid taxes: Negotiate a repayment plan immediately and to avoid court action.
• Telephone: Most people rely heavily on their telephones, and you need a way to stay in contact with your creditors, especially if you don’t want to talk to them at your workplace.

Lower Priority Debts

Lower priority debts are those creditors’ debts for which non-payment results in no or only limited action by the creditors. The worst action that most low priority creditors can implement is initiating court cases. In these situations, the court looks at your ability to pay and, according to your circumstances, will order you to pay a specified amount on a regular basis. Low priority debts may include:

• Personal unsecured loans.
• Credit card debts.
• Rent arrears from a previous tenancy.
• Debts for student loans.
• Bank overdrafts.
• Newspaper and magazine subscriptions.

Debts with Situation-Dependent Priority

Some debts may be difficult to set as high or low priorities. Though non-payment of these bills won't cause harsh consequences in your personal life, there could still be unpleasant end results. When making the decision whether or not to pay these debts, evaluate your relationship with the creditor, the length of time you expect your financial predicament will last, and whether the creditor has turned your account over to a collection agency.

These debts may include auto insurance, medical insurance, expenses pertaining to your children (activities that could be reduced or eliminated) and other debts unique to your situation.

What about your credit report?

When you don’t pay bills, it usually gets noted in your credit report and can harm your ability to get future credit. It’s important to contact all of your creditors immediately if you cannot pay your bills because if you can pay a small amount on each debt, your creditors may be less likely to report negative information on your credit report.

Sixteen Rules For Choosing Which Debts to Pay First

The National Consumer Law Center suggests the using the following rules to determine which debts to pay first

1. Always Pay Family Necessities First.
   Food and essential medical expenses fall in this category.
2. Pay Your Housing-Related Bills.
   Make your mortgage or rent payments if at all possible. If you own your home, real estate taxes and insurance must also be paid. Many times, these two expenses are included in your mortgage payment, so as long as you keep your mortgage payment current, you won’t fall behind on these additional expenses. Likewise, any condo fees or mobile home lot payments should be considered high priorities. If you don’t pay these debts, you can lose your home.
   
   If your financial situation is so serious that you need to move to a lower-cost residence, you might opt to stop paying the mortgage or rent. Don’t use that money to pay other debts; instead, save it to use as a moving fund.
3. Pay What You Must to Keep Essential Utility Services.
   It doesn’t make sense to pay your mortgage or rent if your utilities are turned off. While this may not always require full payment (such as during a winter moratorium on disconnection), make whatever payments are necessary to keep basic utility services.
4. Pay Car Loans or Leases.
   You have to get to work to earn money to pay your bills, and you may need your vehicle for other essential transportation. Make your car loan or lease payments after you have paid for food, housing costs, medical expenses, utilities, and clothing. If you plan on keeping your car, make sure you pay your insurance as well. Most creditors require you carry insurance coverage so that they can recover money if the car is totaled in an accident. If you drop your insurance, the creditor may buy (at your expense) insurance coverage that is more costly than and provides less coverage. It is also illegal in most states to operate a motor vehicle without insurance coverage. If it is possible for you to get by without a car, you not only save on car payments, but also on gasoline, repairs and maintenance, and insurance.
5. You Must Pay Child Support Debts.
   You have a responsibility to take care of your children. Pay your child support, or the court could decide to garnish your wages or send you to prison.
6. 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 must file your federal income tax return even if you cannot afford to pay any balance due. The government has rights other creditors do not. If you have lost income, however, your tax obligations will also be reduced. Pay only what is necessary.
7. 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 promised any collateral for these loans. Legally, you owe them money, and though these creditors may attempt court action against you, there isn’t much they can do immediately to hurt you.
8. Loans Carrying Only Household Goods As Collateral Are Also Low Priority.
   You may have put some of your household goods up as collateral for a loan. Generally, treat this loan the same as a low-priority unsecured debt. Creditors hardly ever take possession of household goods because they have little market value, and seizure takes a court process, which is time-consuming and expensive.
9. Do Not Move a Debt Up in Priority Because the Creditor Threatens Suit.
   Creditors want to collect their money, and may threaten to sue you to get it. Often, these threats are never pursued. If a creditor does sue, it will take time for the court process e and actual collection of any property to be completed. Much of your property may be exempt from seizure, unlike non-payment of debts for your house or car, which can result in immediate seizure by the creditor.
10. Do Not Pay When You Have Good Legal Defenses Against Repayment.
    If a creditor is asking for more money than it is owed, or if the goods that purchased were defective, you have legal reasons not to repay the debt. If you have an attorney, obtain legal advice regarding repayment in these circumstances. Remember that it is especially dangerous to withhold mortgage or rent payments without legal advice. However, whenever you have a valid legal defense for non-payment of debts, consider fighting back.
11. Court Judgments Against You Move Up in Priority, But Often Less Than You Think.
    When a collector obtains a court judgment, that debt will generally become a higher priority, because the creditor can obtain the court’s permission to seize your property, wages, and bank accounts. Nevertheless, your state's law, the value of your property, and your income will determine the seriousness of this threat. All your property and wages may be protected under state law. In this case, you should still pay this debt, but only after fulfilling more pressing obligations. If you haven’t already done so, this would be a good time to obtain professional legal advice.
12. Student Loans Are Medium Priority Debts.
    Most delinquent student loans are backed by the United States government and federal law provides special collection remedies other creditors do not have, such as seizure of your tax refunds and denying you new student loans and grants. Pay student loan debts after top priority debts have been paid.
13. Debt Collection Efforts Should Never Move Up a Debt's Priority.
    Debt collectors have one goal – to get money from you. They will aggressively attempt to collect debts and won’t likely give you any good advice. Make your own choices about which debts to pay based on what is best for your family. Should a debt collector harass you, you have the legal right to request a collector stop contacting you.
14. Threats to Ruin Your Credit Record Should Never Move Up a Debt's Priority.
    Though your credit rating is important, don’t let a threat by a collector to report a delinquency to a credit bureau throw you off track. It is likely the original creditor has already provided the credit bureau with the accurate status of your account. A collector hired by the creditor is very unlikely to do so. Your mortgage lender, automobile finance company, or other major creditors are much more likely to report your delinquency (without any threat) than debt collectors.
15. Co-signed Debts Should Be Treated Like Your Other Debts.
    If others have co-signed for you on loans or other debt and you can’t make the payments for those debts, tell your co-signers about your financial problems. They need to be aware of the situation so that they can decide what to do about that debt and know that collectors will be attempting collection. If you have put up your home or car as collateral on a loan, that is a high priority debt for you if the co-signers cannot or won’t make the payments. If you have not put up such collateral, treat co-signed debts as a lower priority.
16. Refinancing Is Rarely the Answer.
    You should always be careful about refinancing because it can be very expensive and can give creditors more opportunities to seize your assets. Refinancing may be a short-term fix can lead to long-term problems.