If it’s not possible to pay all the bills as they become due, then a decision has to be made: which ones to pay first? This requires categorizing and prioritizing debt. Not all debt is created equal. Following are some general guidelines as to how to categorize debt and prioritize.
Family Necessities: This means the essentials of life: food, utilities, unavoidable medical expenses necessary to receive healthcare, such as co-payment, not outstanding medical bills for treatment already received.
Housing: Pay your rent or mortgage payment, if possible. If you own your home, then real estate taxes and homeowners insurance should be paid, unless these expenses are already included in the monthly mortgage payment. If keeping the house is not an option, then paying these expenses may not be a priority, but you will lose the property at some point, usually within four months, unless other actions are taken.
Pay Car Loans or Leases: If you intend to keep your car, these payments must be current or the lender will repossess the vehicle. Of course, the vehicle must be a necessity, not a luxury. If you are keeping the car, then car insurance should also be a priority.
Child Support: This debt does not go away and there are serious consequences for non-payment, such as loss of driving privileges, and even incarceration.
Income Tax: If the taxes withheld from your wages are not enough to pay the income tax you will owe, then you will have to pay additional taxes, penalties and interest. Also, if you are self-employed, you must pay income tax directly to the government entities. To estimate what you will owe, consult a tax advisor.
Student Loans: These loans must almost always be paid but there are special remedies if they cannot be paid on time as agreed. These remedies include: payment reduction, stop payment for a period of time and even cancellation of some debt. However, most of these loans are guaranteed by the federal government. When the loans are in default, the government can seize tax refunds and deny future benefits.
Credit Cards, Personal Loans: These are low priority debt because there is very little a creditor can do short-term if not paid. These are unsecured loans. If you do not pay, there is no property that the creditor can take. This includes loans, or other credit, for which you co-signed. Also included in this category are unpaid medical/hospital bills and bills for other professional services.
Do not move a debt up in priority because a creditor or collector threatens to sue you. You are just making their job easier and your situation worse. Finally, while dealing with the immediate problem of paying debt, you should always look at the big picture. Short-term fixes often lead to long-term problems.
For a free initial consultation regarding debtors’ rights, consolidation of debt, payment reduction, bankruptcy (personal and business) and other related matters, please contact Susana B. Tolchard at 661-287-9986.