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Which Debts Should You Pay: Strategies for Debt Repayment

Which Debts Should You Pay: Strategies for Debt Repayment

Some debts are more important than other debts are. 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 are not.

Essential Debts

An essential debt is one, which, were you to let it slide, could subject you to serious, even life threatening, consequences. You should put these debts at or near the top of your list for payment.

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 have 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 is 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 do not pay.

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 could not pay.

Car payments. If you need your car to keep your job, make the payments. If you do not, consider selling it to avoid repossession. You may be able to use any leftover money to buy a cheaper car (or, if circumstances allow, pay for public transportation).

Other secured loans on essential property. Secured debts are linked to specific items of property. If you do not repay the debt, most states let the creditor take the property without first suing you and getting a court judgment. If you do not care whether the property is taken or are confident that the creditor does not really want it, do not worry about missing a payment or two. If the property is something you cannot live without, however, you will need to keep that debt current.

Unpaid taxes. If the IRS is about to take your paycheck, bank account, house or other property, you'll want to 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.

Credit and charge cards. If you do not pay your credit card bill, the worst that will happen before the creditor sues you is that you will lose your credit privileges.

Department store and gasoline charges. As with credit and charge cards, if you fail to pay these bills, you will 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.

Newspaper and magazine subscriptions. These debts are never essential.

Legal and accounting bills. These debts are rarely essential.

Other unsecured loans. An unsecured loan is not tied to any item of property. The creditor cannot take your property. If you refuse 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 will not 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 will want to continue making these payments. In addition, if you have medical insurance through work and lose your job, you will probably be able to keep your insurance coverage for 36 months, but you, not your former employer, will have to pay for it. If you let it lapse, you may have difficulty getting new insurance. It is almost always easier to continue insurance than to reinstate it after an interruption.
  
  
• 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. This obviously varies with your and your children's circumstances. 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 is not essential if the holder of your loan is not 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 up to 10% of 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 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. Unpleasant and hard to ignore isn't the same as essential. 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 will not have enough money left to pay for these crucial services.

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