Which Debts Must You Repay?
Some debts should be paid before others.
Learn which debts should be your top priority.
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 consequences.
Rent. Unless you know you are going to
move and have a place to live, make paying your rent a top
priority.
Mortgage. If you've lost your job or had
another financial setback, carefully consider the pros and cons of
selling your house.
- Reasons to sell. 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.
- Reasons not to sell. Consider the housing market. If your house will be worth more in a year than it is today, you might wait and sell later. That would give you more money to pay your creditors
Child support. Failing to pay child
support can land you in jail. What's more, a child support debt
never goes away -- it doesn't expire, and you can't wipe it out in
bankruptcy. You'll have to pay this money sooner or later, so you
should try do it when it will help your kids the most.
Utility bills. Being without gas,
electricity, heating, water, or a telephone is not safe -- put
these bills near the top of your list.
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.
Other secured loans. A debt is secured if
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 the property is something you
cannot live without, stay current on your payments.
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. But a default on a loan or a repossession of
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, immediately
contact the IRS to set up a repayment plan.
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. Just remember that failure to pay any debt
will cause it to stay on your credit report for seven years.
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.
Loans from friends and relatives. You may
feel a moral obligation to pay, but these creditors are most likely
to be understanding of your predicament. 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 failure to pay will lead to
collection actions.
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 take your property without first suing you in court.
Some debts straddle the line between essential and nonessential.
Not paying won't cause severe consequences in your personal life,
but 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 register your car without proof of
insurance.
- 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.
- 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.
- Car payments for a car that is essential for
your job. The inconvenience of not having a car may justify
making these payments.
- 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.
Stick to Your Debt Paying Plan
Do not make payments on nonessential debts unless you have money left after paying the essential ones. Don't lose sight of your priorities if nonessential creditors are breathing down your neck. To learn about creating a budget to help you manage your personal debt, see Nolo's article How to Make a Budget and Stick to It.
Want More Information?
Solve Your Money Troubles: Debt, Credit & Bankruptcy, by
Robin Leonard and attorney Margaret Reiter (Nolo) is a
comprehensive debt guide that includes information on budgeting,
controlling debt, and dealing with debt collectors.
Copyright 2011 Nolo
