Which Debts Must You Repay?
All debts are not created equal. Learn which are most important.
Some debts are more important than others. If you are having trouble paying your bills, take the time to prioritize your debts. Make a list of essential and nonessential debts -- and always pay the essential debts first. Read on to learn which debts are essential and which aren't.
Essential Debts
An essential debt is one that you should put at or near the top of your list for payment. If you let an essential debt slide, you could face serious, even life-threatening, consequences.
Rent or mortgage. Unless you know you are going to move and have a place to live, make paying your rent a top priority. House payments are a little different. If you've lost your job and it looks long-term, you should 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. If you decide to stay put, payments on a home equity line of credit or second mortgage are also essential because you can lose your house if you don't pay.
Carefully consider all the pros and cons before you sell your house. In today's housing market, your house probably will be worth more in six months or a year than it is today. Selling it will deprive you of an asset that can make you money over time, and may result in your being locked out of the housing market once you are back on your feet. At the very least, consider that you may get more for your house if you sell it later on, giving you more money to pay your creditors.
Utility bills. Being without gas, electricity, heating, water, or a telephone is dangerous.
Child support. Not paying can land you in jail unless you convince the judge that you really couldn't pay.
Car payments. If you need your car to keep your job, make the payments. If you don't, consider selling it to avoid repossession. You may be able to use any leftover money to buy a cheaper car.
Other secured loans. If you have secured debt, this means that a specific item of property (called 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 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. If the property is something you cannot live without, however, you'll need to keep that debt current. Default on the loan or repossession of the property will appear on your credit report for seven years and will affect your ability to get credit in the future.
Unpaid taxes. If the IRS is about to take your paycheck, bank account, house, or other property, you should negotiate to set up a repayment plan immediately.
Nonessential Debts
A nonessential 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. But remember, failure to pay them will cause them to stay on your credit report for seven years.
Department store and gasoline charges. As with credit and charge cards (discussed below), 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.
Loans from friends and relatives. You may feel a moral obligation to pay, but these creditors -- who probably seem the least like creditors of anyone -- 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 are never essential, but will no doubt lead to collection actions.
Legal and accounting bills. These debts are rarely essential.
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 nonessential. 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.
Some of these debts include:
- Auto insurance. In some states, you can lose your driver's license if you drive without insurance. In California, you cannot even register your car without proof of insurance.
- Medical insurance or bills. Especially if you are currently under a physician's care, you'll want to continue making payments. Also, if you have medical insurance through work and lose your job, you'll probably be able to keep your insurance coverage for 18 months (and even longer in some circumstances), but you, not your former employer, will have to pay for it. If you let it lapse, you may have difficulty getting new insurance.
- 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.
- 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.
- 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.
- 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, the holder of your loan threatens to garnish your wages, or you are making payments under a "reasonable and affordable" repayment plan to rehabilitate your loan and get out of default.
Do not, under any circumstances, make payments on nonessential debts when you have not paid essential ones, even if your nonessential 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 in mid-March because you won't have enough money left to pay for these crucial services.
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