If you don’t have enough money to pay all of your bills, which should you pay first, and which ones can slide for a while? That’s the question frequently showing up in my email inbox these days. The past year has been so difficult for so many. And with each request for help I receive, the more my heart breaks for my dear readers going through such financially trying times. Then I pull myself together, recalling with certainty that “tough times never last, but tough people do.”
Now is the time to get tough, to pull ourselves together, get a plan and get to work.
Allowing bills to become delinquent is wrong, but there are times when your available cash can be stretched only so far. That doesn’t mean you are excused from payment, just that you need to know how to prioritize in a way that will cause the least amount of long-term damage and keep you in the best position to eventually get caught up.
Even if you are not in this position now, it’s good to have a good grasp on how to react, knowing what to do if it ever happens. Without a standby plan, more than likely you’ll do the wrong thing with the limited amount of money you have to work with. It’s the old adage about the “squeaky wheel getting the most grease” at play!
Here is the important rule of thumb: Do not make payments on nonessential debts when you have not paid essential ones, even if your nonessential creditors are the “squeaky wheels” breathing down your neck.
ESSENTIAL DEBTS
An essential debt is one that if not paid could produce severe, even life-threatening consequences. Once you’ve determined which debts are essential, prioritize them according to the severity of the consequences you will suffer for nonpayment:
—Life necessities (food, medical and health insurance)
Going without food, life-saving medications and basic health insurance will prove catastrophic. This is your top priority. But don’t eat steaks three times a week when you are unable to pay the phone bill.
—Rent or mortgage
Always assume that your landlord or mortgage lender will immediately proceed to evict or foreclose if you are late with a payment. Falling behind here could put you out on the street with the kids and the TV.
—Child support
Paying court-ordered child support is absolutely essential. Not paying can land you in jail.
—Utilities
You may not have to pay the full amount of the bill, but the minimum necessary to avoid disconnection should be made if at all possible.
—Car payments
If a car is necessary to keep your job, making the loan or lease payment is the next priority.
—Other secured loans
This means something you dare not live without that the lender can repossess for nonpayment.
—Unpaid taxes
If the IRS is about to take your paycheck, bank account, house or other property, you need to set up a repayment plan immediately.
NONESSENTIAL DEBTS
These are financial obligations that will have a lesser and/or significantly delayed effect if you withhold payment for a limited time. Understand that to do so may cause blemishes to your credit file. But in the big picture, a blemished credit report is easier to live with than being thrown out of your home or having your car repossessed.
—Student loans
Most delinquent student loans are backed by the U.S. government, and the law provides for special collection remedies. These could include seizure of your tax refunds and special wage garnishment.
—Credit, department store and gasoline cards
The consequences for falling behind with these debts will be losing your credit privileges and, if the debt is unusually high, you may be sued.
—Loans from friends and relatives
You should feel a moral obligation to pay, but these creditors will likely be the most understanding of your situation. Have an honest talk, explain your situation and plan and then confirm your commitment to full repayment.
—Medical, legal and accounting bills
While these debts are real and will be paid eventually, they are rarely essential, with one exception: If you are still receiving necessary treatment from the provider to whom you owe money, you must keep up with minimum payments to prevent these services from being cut off.
—Other unsecured loans
Every other debt you owe is probably in this category. These unsecured debts are rarely, if ever, essential to pay first.
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