How to Prioritize Debt

ADVERTISEMENT

When money gets tight and there isn't enough to go around, people sometimes begin to panic when it comes to prioritizing outstanding debts.

A growing number of people are keeping up on their credit card bills while they stop payments on their home mortgage. Their thinking seems to be that credit-card debt is easier to handle. Unfortunately, this is a terrible personal finance move.

It's vitally important to know which expenses to pay first when you are short on money. You need to know which debt payments will benefit you the most, so that you can limit the financial damage as much as possible.

High-Priority Items

While you will need to take a hard look at the specifics of your particular situation, here are some basic guidelines for determining which debts should have the highest priority when resources are tight:

Survival necessities: First and foremost, make sure that you have enough money for food and basic clothing to survive. This also includes any medication you may need for illnesses and payment for medical service if prepayment is required (this does not include old medical bills). While there are charities that help with these costs, make sure that you have enough money for anything they may not cover.

Housing: Whether you have a home mortgage or are paying rent, keeping your housing payment up-to-date is essential so you have a place to live. If your finances get so tight that you are unable to pay your mortgage or rent and know you're in danger of losing your home, don't use your money to pay off other bills. Many people do, but this usually isn't a good financial strategy. If you lose your current home, you'll have to move and find a new place to live. You will need money to do this. It's therefore better to keep money aside until you find a new, more affordable place before you use the money meant for your mortgage to pay off other bills.

Essential utilities: You need to pay your utility bills, which will help to keep your residence livable. This includes gas, electricity and water bills. You may be able to defer payment of these bills, depending on where you live and the season (it is common that heating can't be turned off in the winter). Alternatively, you may be able to make partial payments and still receive the service. Make sure that you pay at least the minimum to keep them active. Most other utilities are not essential, although some are easier to determine than others. For example, your cable TV is clearly not essential, but your phone could be if you need it for work.

Car loan: If your car is essential for you to keep your job and continue to earn money, this is also a payment that you need to keep current. If you lose your car, then you lose your way of earning money -- which can cause even more financial problems. If your car is not needed for your work (for example, you can take the bus, carpool or find some other transportation), your car payment falls lower on the list. Much like with a mortgage, if you can't pay this loan and know you will be losing your car to repossession, don't use the money meant for the car loan on other debts. You'll need the cash to get some other type of transportation to keep your job.

Child support: Beyond the moral obligations of taking care of your family, not keeping up on these payments can have severe consequences, including being arrested and going to jail.

Taxes: The government has privileges that other institutions don't when it comes to collecting debt, which makes paying any taxes you owe essential. The Internal Revenue Service can automatically deduct money owed from your wages, seize your bank accounts and other assets, such as your car or house, and even get you jail time for not paying. If you don't have the money to pay taxes, contact the IRS, because individuals can often work out long-term payment plans.

Student loans: While not as essential as the other debts mentioned above, these can also cause trouble if left unpaid. The problem is lenders can take automatic deductions from your paychecks, which can throw your budgets out of whack. Lenders may also claim your tax refund to pay this debt.

Low-Priority Loans

While you should make every effort to pay all your debt obligations, some debts can be put off in an emergency. While non-payment of these debts can bring harassment, debt collectors rarely have your best interests in mind. They are only after the debt they are trying to collect, and they will say anything to try to convince you to pay.

Your most important obligation is to yourself and your family, and you need to pay the debts in the order that they benefit you the most. Never change your payment priorities because of debt collectors' demands.

Here are a few debts and bills that take a back seat to those mentioned above:

Credit cards: Any unsecured debt is a low priority when you do not have enough money. This includes credit cards, gas cards and department store cards. Again, don't let the annoying tactics of debt collectors change your payment priorities.

Service debts: Bills from a doctor, dentist or hospital for which service has already been rendered also fall into this lower payment category. If you are able to make some payment, but not all, these debts can often be negotiated.

Timeshares, boat loans and RV loans: Making payments to vacation resorts that aren't your primary residence or for other luxury items, such as a boat or recreational vehicle, are of low priority. While these items may be repossessed, they aren't essential for your everyday living and you shouldn't spend what little you have available on them.

By having a firm understanding of which debts are most important to pay when there isn't enough money to go around, you will ensure that you don't get yourself in any more financial trouble than is necessary.

Show Comments

Back to Top