Deciding Which Debts to Pay First

When you are between jobs, the paychecks may stop coming, but the bills don’t.  You’re legally obligated to pay all debt, but when you don’t have enough money to cover your monthly expenses and pay your creditors the minimum amount due, you face some tough decisions.  There is no magic list of the order in which debts should be paid since everyone’s situation is different.

Here are some general rules about how to set priorities:

  1. First, pay housing-related bills. Keep up rent or mortgage payments if at all possible.  Failure to pay these debts can lead to loss of your home.
  2. Pay basic living expenses next. This includes groceries and medical insurance if you can afford the premiums.  Your reduced income may qualify you for FoodShare food assistance or BadgerCare medical assistance.  Check out or contact your county human services office to see if you qualify.
  3. Pay the minimum required to keep essential utility service. Full and immediate payment of the entire amount of the bill may not be required, but you should make the minimum payment necessary to avoid disconnection if at all possible.
  4. Pay car loans or leases next if you need to keep your car. If a car is needed to get to work, you will usually make the car payment the next priority after housing, food, and utilities.  Your creditor can repossess your car without going through the courts first.  If you keep the car, stay current on insurance payments as well to avoid additional fees, legal problems, or an overwhelming expense from an accident.
  5. Make tax debts a high priority. You must pay any income taxes owed that are not automatically deducted from your wages and any property taxes if they are not included in your monthly mortgage payment.  You must file your federal income tax return, even if you cannot afford to pay any balance due.  The government has many collection rights that other creditors do not have.  Also pay child support; these debts are court-required and will not go away.  Nonpayment can result in very serious problems, including prison for nonpayment.
  6. Make student loans a medium priority. In general, pay them ahead of low priority debts but after top priority debts.  Since most student loans are backed by the government they are subject to special collection remedies, such as wage garnishments, seizure of tax refunds, and denial of new student loans and grants.
  7. Make loans without collateral a low priority. These include credit card debts, doctor or hospital bills, other debts to professionals and similar obligations.  Since you have not pledged collateral for these loans, there is rarely anything these creditors can do to hurt you in the short term.
  8. Make loans with only household goods as collateral a low priority. Creditors rarely seize the goods due to their low market value and the difficulty in retrieval without involving the courts.  If the creditors do start actions to repossess household items, you will be notified by letter.
  9. Treat cosigned debts like any others. For example, if you put up your home or the car as collateral, that is a high-priority debt for you if other cosigners are not keeping the debt current.  If you have put up no collateral, make the debts a low priority.  If others have cosigned for you, you should let them know about your financial problems so that they can decide what to do about the debt.
  10. Don’t pay when you have a good legal reason to not pay. Examples include defective merchandise or the creditor is asking for money that it is not entitled to.  If you believe you have a legal defense, contact a lawyer.
  11. Don’t move up a debt’s priority based on threats to ruin your credit report. In most cases, the creditor has already reported the delinquency to a credit bureau.
  12. Don’t move up a debt’s priority because of debt collection efforts or threat of a lawsuit. Be polite to a collector, but make your own choices about which debts to pay based on what’s best for you.  Many threats are not carried out, and the procedure itself is long and complicated for the creditors.  On the other hand, nonpayment of rent, mortgage, and car debts may result in immediate loss of your home or car.
  13. Do move up court judgments in priority if the creditor has already sued. After a court judgment, that debt should move up in priority because the creditor can enforce that judgment by asking the court to seize your property, wages, and bank accounts.
  14. Be cautious about consolidating debts or refinancing your home. Depending on your situation, this may or may not be the right option for you.  It can be expensive and give creditors more opportunities to seize your important assets.  A short-term fix can lead to long-term problems.
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