How do you decide which bills to pay when you have too many? This article is intended to help you prioritize your bills when you are “robbing Peter to pay Paul”.
The approach is simple, pay High Priority Debts and hold-off on paying Low Priority Debts, until the High Priority Debts are under control.
The highest priority bills are food, medicines and your home.
High Priority Debts:
We can work together to negotiate with your creditors to accept lower payments. Or, save the money to catch up later, to cover the costs of moving or to pay for another car if your car is repossessed.
If you can’t juggle high-priority debts we can discuss Bankruptcy. Some of the other high priority debts are:
Automobile debt (if you need the vehicle to work)
Child support & alimony
Low Priority Debts:
Lower priority debts should not be paid ahead of higher priority debts if this keeps you from dealing with high priority debts. Low priority debts only become higher priority when you are sued in court on the debt. Some low priority debts include:
Medical debt that is overdue, such as hospitals, doctors, other medical professionals, dentists, and ambulance companies. This debt does not affect your credit rating for six months, is unlikely to involve high interest rates or late charges, and it could take a year or two before you are sued, if you are ever sued at all. Medical debt does not result in immediate loss of your property or income, unless you are successfully sued on the debt. By the way, if you have medical debt you’re in good company. In 2014 the Consumer Financial Protection Bureau reported 43 million Americans had overdue medical debt.
Credit card debt. You will not be subject to seizure of bank accounts, income, or property unless you are successfully sued on the debt or there is a default judgment entered against you. Debt collection contacts can easily be stopped. Interest and late charges may even stop after you are six months delinquent.
Debt owed friends and relatives. Non-payment is not going to harm your credit rating or result in lost property or wages, and you may not even be charged interest. Of course, you want to repay these debts, but your friends or relatives who lent you money are unlikely to want you to lose your home or car just to pay them back sooner.
Private student loans. These loans typically do not involve collateral, and special remedies available to the government to collect federal student loans do not apply to private student loans. However, private student loans are difficult to discharge in bankruptcy.
Debts you owe as a co-signer. If you co-signed for someone and put up your home or car for their debt, the loan should be treated as high priority. If the other person isn’t paying, your home or car can be foreclosed or repossessed. On the other hand, if others have cosigned for you, tell them about your financial problems so that they can make plans.
Other loans for which you are a co-signer but have put up no collateral are low priority.
Deficiency debt after your home is foreclosed or your car is repossessed. If a creditor forecloses or repossesses your home or car and sells it for less than the amount owed on the loan, it may sue you for the difference, called “a deficiency.” This is a low priority debt because you have already lost the house or car, your credit rating has already been damaged, and the creditor can do little other than sue you. If you are sued, you often have solid defenses that prevent the creditor from recovering the deficiency. If the creditor prevails and the court enters a judgment against you, the debt becomes high priority.
Charge accounts or other debts owed to merchants, particularly if the merchant has not taken as collateral the goods sold.
Small loans, even when creditors take household goods as collateral. Non-payment is unlikely to cause you to lose collateral because creditors aren’t likely to take the time or incur the expense to obtain a court order.
Lower priority debts should not be paid ahead of higher priority debts. And never pay low priority debts just because you can’t keep up with high priority debts, for example—“If I can’t pay my mortgage, at least I will keep up with my credit cards.”
This is bad thinking. Either pay another high priority debt or save to pay a high priority debt later in the month. Low priority debts only become higher priority when they sue you and that can take a very long time. Some low priority debts include:
Debts That Quickly Become High Priority. Other debts can be put off for a few months, but at some point soon, they become high priority debts. Most notable are:
- Home mortgage (including non-payment of a debt to buy a manufactured home). Miss a month or two and you are unlikely to face foreclosure, but if you get behind by enough months, you face loss of your home. In some states this can happen without a court hearing.
- Real estate taxes. If you do not have an escrow account with your mortgage lender you are responsible for paying your own property taxes. While non-payment of property taxes will not result in the immediate loss of your home, at some point your home will be subject to a tax sale.
- Federal student loans are not in default until you are nine months behind on payments, but then you risk seizure of your tax refund and your Social Security or other federal benefits, wage garnishment without a court order, and denial of new student loans and grants.
- Taxes owed to the IRS. Even if you do not pay your federal income taxes when due, always file your tax return on time, or file it by the deadline set by any requested extension. Then you can delay for a time paying taxes owed without serious adverse consequences. But at some point it will be critical to work out an arrangement with the IRS, because the IRS can seize your bank account, part of your paycheck and federal benefits, and even your home.