Sixteen Rules About Choosing Which Debts to Pay First
You should direct your limited resources to what is most necessary for you
or 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, from Surviving Debt (National Consumer Law
Center, 3rd ed. 1999).
Always Pay Family Necessities First. Usually this means food and essential
medical expenses. You may want to look at ways to keep these expenses to a
minimum as discussed in Chapter Two.
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 problems which require you to
move to a cheaper residence, you might choose to stop paying the mortgage
or rent. 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. Dealing with mortgage debts
is discussed in more detail in Chapters Nine through Twelve. Rent payments
and dealing with landlords are discussed in Chapter Thirteen.
Pay What You Must to Keep Essential Utility Service. While this may not
always require full payment (such as during a 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. Options for nealing with utility payments are
discussed in Chapter Fourteen.
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, medical
expenses, utilities, and clothing. You may even want to pay for the car 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 for you 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. Car loan debts are discussed
in Chapter Fifteen.
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 if you cannot afford to pay
any balance due. The government has many rights which other creditors do not
have, particularly if you do not file your tax return. 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 goods 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.
See Chapter Sixteen.
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 to 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. Debt collection lawsuits and threats to sue are discussed in Chapters
Five and Seven.
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 as discussed in
Chapter Eight.
Court Judgments Against You Move 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, and then you should still pay this debt only
after more pressing obligations. For more detail, see Chapter Seven. This
is also a good time to obtain professional advice if you have not done so
already.
Student Loans Are Medium Priority Debts. They should generally be paid ahead
of low priority debts, but after top priority debts. Most delinquent student
loans are backed by the United States and federal law provides special collection
remedies against you which other creditors do not, such as seizure of your
tax refunds and denying you new student loans and grants. These issues are
discussed in Chapter Seventeen.
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. See Chapter
Five.
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 account. 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. See Chapter Six.
Cosigned Debts Should Be Treated Like Your Other Debts. If you have put
up your home or car as collateral on a loan, 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. Some
simple refinancing rules and techniques to avoid scams are discussed in Chapter
Four.
and NCLC