Salvaging Finances and Prioritizing Debts

If a person or family has suffered an unexpected and, probably, a short- term loss of income, as for example, the loss of employment that is not expected to last a very long time, or a sudden and unexpected financial burden, it is necessary to prioritize debts into "essential" and "non-essential" categories. This is not to suggest that all bills and obligations are not valid and ultimately due, but it is important to appreciate the consequences of leaving one or some creditors unsatisfied for the short run.

(Ultimately, a debtor may have to resort to Bankruptcy protection. There are specific rules for that protection which will be discussed in a general fashion in a later article. As part of the new bankruptcy law, a debtor may be required to undertake credit counseling; if one's debts are too overwhelming, and even if you need a little help, a visit to a non-profit credit counseling agency may be helpful. The U.S. Department of Justice's Trustee site provides a list of approved agencies.)

However this article presumes that the difficulties are not so severe as to warrant bankruptcy and that a short-term approach is sufficient.

Some debts are more important than others. If you are having trouble paying bills, take the time to prioritize your debts. Make a list of debts that must be paid, without fail, and those that can wait -- and always pay the essential debts first. Do not be influenced by the frequency of bill collectors' calls; it may be possible to lessen these in any event. (In a future article, I will discuss illegal tactics by bill collectors and the laws that forbid undue harassment.)

An essential debt is one that you should put at or near the top of your list for payment. The consequences of non-payment of an essential debt can be harsh indeed.

Rent or mortgage.

Unless you know you are going to move and have a place to live, make paying your rent or mortgage the highest priority.

If you own your house, and you've lost your job or had another financial setback, be realistic about whether you can afford to stay in your home. You might be better off selling your home, renting a moderately priced place, and using what's left over to pay your other essential bills. But carefully consider the pros and cons before you sell your house. But, no matter what, pay the rent or mortgage, first.

Child support.

Not paying child support can land you in jail, unless you convince the judge that you really couldn't pay. It will also cause any income tax refund to be intercepted to pay off arrears. Besides, you owe to your children.

Utility bills.

Being without gas, electricity, heating, water, or a telephone is not safe -- put these bills near the top of your list. But, if worse comes to worst, you can live without a telephone, especially one of the real spiffy cellular jobs that will send pictures, messages, play games and make coffee.

Car payments.

If you need your car to keep your job, make the payments. If you don't, consider selling it or voluntarily turning it over to avoid repossession. You may be able to use any leftover money to buy a cheaper car. Again, if you cannot keep the car, there are alternative arrangements.

Other secured loans.

A debt is secured if a specific item of property (collateral) is used to guarantee repayment of the debt. If you don't repay the debt, most states let the creditor take the property without first suing you and getting a court judgment. If the property is something you cannot live without, you'll need to keep payments on that debt current.

If you don't care whether the property is taken, or are confident that the creditor doesn't really want it, don't worry about missing a payment or two. However you should realize that a default on any bill can reflect on a credit rating for a number of years, usually seven or ten; this is a consequence that can be mitigated but not eliminated.

Unpaid taxes.

Don't ignore our friends at the Internal Revenue Service. IRS can take a part of your paycheck (regardless of state laws on garnishment), all of your bank account and grab whatever is loose! That agency is usually quite willing to negotiate a repayment plan - just don't ignore them.

Almost everything else is non-essential and can wait!

A non-essential debt is one with no immediate or devastating effects if you fail to pay. Paying these debts is a desirable goal, but not a top priority. However, failure to pay any debt will cause it to stay on your credit report for a period of years. Sooner or later, bills must be paid or negotiated away; but putting them off will not cause irreparable harm.

Department store and gasoline charges.

If you fail to pay these bills, you'll probably lose your credit privileges and, if the debt is large enough, you may be sued. You may well be sued by any of your creditors; again, worry about that later.

Loans from friends and relatives.

You may and do feel a moral obligation to pay, but these creditors should be the most understanding with you. See if you can defer making payments until you are back on your feet or agree on an alternate repayment plan.

Newspaper and magazine subscriptions.

These debts aren't essential, but will no doubt lead to collection actions. Again, so be it!

Legal and accounting bills.

These debts are rarely essential, but may lead to threatening letters and lawsuits if they remain unpaid.

Other unsecured loans.

An unsecured debt is not tied to any specific item of property -- in other words, there is no collateral for the debt. This means that a creditor cannot simply take your property if you fail to pay. The creditor can collect from you only by suing you and obtaining a court judgment. These unsecured debts are rarely, if ever, essential to pay first.

Essential or Nonessential?

Some debts straddle the line between essential and non-essential. Not paying won't cause severe consequences in your personal life, but it could prove painful nonetheless. In deciding whether or not to pay these debts, consider your relationship with the creditor and whether the creditor has initiated collection efforts.

Auto insurance.

In some states, you can lose your driver's license if you drive without insurance. In California, New York and Florida, for example, you cannot even register your car without proof of insurance. On the other hand, while driving without insurance is not very wise (and may be illegal), it is said that the number of uninsured vehicles in Florida is enormous.

Medical insurance or bills.

If you let your health insurance lapse, you may have difficulty getting new insurance. Especially if you are currently under a physician's care, you'll want to continue making payments. Try and work out a payment schedule with the doctor. There is no negotiating with the insurance company and hospital bills can wait.

Credit and charge cards.

If you don't pay your credit card bill, the worst that will happen before the creditor sues you is that you will lose your credit privileges. But penalties and interest add up quickly. Talk to the credit card issuer before the problem exacerbates. Do not, however, agree to a payment plan that places the credit card obligation ahead of the essential debts or cannot be followed without fail. Most creditors will agree to a negotiated plan but then expect you to stick to it.

Car payments for a car that is essential for your job.

The inconvenience of not having a car may justify making these payments.

Items your children need.

Paying for a tutor for your child may not seem essential, but if the alternative is to have your child grow up unable to read, you probably want to keep paying for the help. The key word is "need"; a tutor may be needed, new in-style designer clothes probably are not.

Court judgments. Once a creditor has a judgment, the creditor can collect it by taking a portion of your wages or other property. If a particular judgment creditor is about to grab some of your pay, the fact that the original debt may have been nonessential is irrelevant. Judgments are also a lien on real property, even protected "homestead" property.

Student loans. Paying an old student loan isn't essential if the holder of your loan isn't hassling you. But paying the loan may become essential if the IRS is about to intercept your tax refund, if the holder of your loan threatens to garnish your wages, or if you are making payments under a "reasonable and affordable" repayment plan to rehabilitate your loan and get out of default.

Do not make payments on non-essential debts when you have not paid essential ones, even if your non-essential creditors are breathing down your neck. This may sound obvious, but when pressured by bill collectors, many people forget the obvious. For example, if you pay a few dollars on an old hardware store bill just because its collector is the loudest or most persistent, you may face eviction or have your heat turned off because you won't have enough money left to pay for these crucial services.

One of the most important thing to remember is that it is usually worse to ignore any creditor. Explain the difficulty and offer a realistic estimate when your financial situation will improve. And if, it looks like the situation will not improve in the foreseeable future, consider credit counseling and, if all else fails, speak to a bankruptcy attorney.