Setting Priorities When Repaying Debt

Each payday, as you tackle excessive amounts of debt and your income is just not enough to satisfy all of the payments due to all of your creditors, you are often faced with making challenging choices and decisions. Which bills must be paid, how much will go to each and which could you either pay less than what is due or skip a payment month altogether?

When faced with these challenges what should you do? We’d like to help you set priorities when making those debt payments every month, and our advice starts with this rule:

Pay according to your budget, not the calendar.

To start, it’s important to have a clear and accurate account of all of your monthly income and all of your payment obligations, including when payments are due and their amounts. Using this information, you can establish a budget and payment schedule that lines up, the best that you can, with the timing and amount of your paychecks. However, when there is not enough to cover everything, you must prioritize. It’s typically a good idea to make payments as close to their due date as you can, but when faced with making tough choices, one should look to the type of debt to decide how best to prioritize.

Which debts are more important than others? We generally rank them this way:

  1. Your rent

    This is the first debt you should pay each month. The consequences of not making this payment are dire—you could end up evicted and with a very bad impact to your credit score. Rental eviction scenarios can accelerate quickly, depending on your local laws. Finding yourself on the street with no roof over your head is a worst-case scenario and should be avoided.

    Your mortgage payment

    Like rent, the consequences of missing a mortgage payment can be severe, and eventually lead to having nowhere to live. Unlike rent, however, foreclosure from mortgage default takes longer and there are many options available to homeowners who miss payments. Visit homeownership.org if you need mortgage help. Talk to a housing counselor to find out what kind of options you have regarding your rental or mortgage situation.

  2. Car loans

    Assuming a car is both the best mode of transportation and the least expensive way to get where you need to go, work for example, staying current on car payments is critical. Auto lenders typically do not offer much in the way of relief for late or missed payments. Repossession activities can also occur after a short period of missed payments, so stay diligent on making car payments. If you must resort to missing a car payment, it’s always in your best interest to proactively contact your lender to let them know and inquire what options, if any, they have to help your through the difficult financial period.

  3. Essential utilities

    While not all utilities rank this high on the list, electricity, water and gas services do. Always put health and welfare for you and your family first, so paying essential utilities on time is important. Utility companies are also quick to turn services off for non-payment. However, depending on the nature of your financial hardship, most public utility companies do offer assistance for their struggling customers. You do have to contact them to get the specifics. Also, in areas of extreme heat or excessive cold conditions, where monthly usage and costs exceeds a normal billing cycle, utility companies may also offer alternative payment arrangements. Visit their web site or call directly for information. Non-essential utilities. There are a number of services that could be classified as non-essential, such as cable TV, or streaming video or music services. A good rule to follow when challenged to make monthly payments is to first look to reduce services, such as removing excess cable channels, lowering speed of Internet connection, or reducing a data plan on your cell phone.

  4. Legal obligations

    If you are personally liable or otherwise legally or court ordered to pay a debt, missing or reducing payment amounts could have severe negative consequences. Obligations such as child support or government taxes are examples and unlike many other types of debt, you normally cannot get out of paying, even filing bankruptcy typically won’t help reduce or eliminate these debts. It’s also possible to serve jail time for non-payments. If you are ever in situation where you cannot make a payment, always make contact with whomever you owe to explain situation and try to make other arrangements. This article is for informational purposes only, and does not constitute legal advice. You should seek the advice of a licensed attorney for advice regarding your individual situation.

  5. Secured debts

    If you borrowed money to pay for items considered real property, such as jewelry, furniture, appliances, TV’s or computers, the result of non-payment usually is the property will be repossessed. For these types of debts, being proactive is best course of action. Decide what is most important for you to keep and if you can maintain payments on it. For all other items, consider selling and using the proceeds to pay off the debt directly. If the resale value isn’t enough to cover all of the debt owed, discuss options with the lender directly as they may be able to work with you for a reduced payoff.

  6. Unsecured debts.

    These types of debts are almost always connected to a credit card. To avoid high interest charges, it is always best to payoff outstanding balances in full each month. When that is not an option, make the highest payment you can make on the ones that have the highest interest rate and highest balance owed. Do your best to not skip any monthly payments and if necessary, make use the minimum payment option to maintain a current status. Credit card related delinquencies have a very negative impact on your over credit score and will likely adversely impact your ability to get future credit. Talk to a credit counselor to find out what kind of options you have for unsecured debts.

  7. Medical debts

    Typically, medical debts don’t carry an interest rate but be careful as some do impose late fees or penalties. While long term non-payment could result in a personal legal suit to recover payments, in the short term, making a small amount or missing a payment here or there is usually ok. However, if you depend on continuing medical care from the provider you owe money to but cannot pay, be proactive and let them know your situation and ask for other arrangements to be made.

  8. Student loans

    Federal student loans carry fixed interest rates that are often times lower than private loans.   Interest rates can vary depending on the type of the student loan, and under a default situation, often times the penalties are increased interest rates. This type of debt though is the usually the easiest to defer payments or restructure if you’re struggling financially. If you are struggling to pay your federal loans you may be able to temporarily postpone or lower payments. Talk to a student loan debt counselor to find out what kind of options you have for student loans.

  9. Debts in collection

    If an unpaid delinquent debt has been sold by your original creditor to what is commonly known as a debt collection agency, the credit related damage has already been done and you will see an impact to your credit score. Beyond the agency exercising excessive collection calls and threatening litigation, for most types of debt, these debt owners do not have much by way of remedies. If your debt is sufficiently large and they can ascertain you have assets, they may pursue legal action to personally sue you to pay on your obligation. Generally, don’t move a debt up in the priority list because a debt collector tells you to. Even if they threaten to sue. If legal action does begin, you can seek legal assistance to help you through it.

  10. Services and subscriptions

    When pressed to meet your monthly obligations, , it’s definitely time to reprioritize any and all unnecessary services and subscriptions, such as landscape and cleaning services as well as magazines or other ancillary memberships or activities. Gym memberships, club dues, or any smartphone app that carries a monthly subscription is expendable and should be suspended until your situation improves.

If you are struggling to maintain your monthly budget, manage debt payments and keep up with necessary monthly obligations, speaking with a financial coach could make a substantial difference for you. Certified financial credit coaches will help you update or create your budget, provide expert advice, tips and resources for overall better money management and assess available solutions for improving, reducing and paying off overall debt levels. Request a priority appointment now.

If you are served with a lawsuit or other court papers, don’t ignore them. Talk to an attorney right away and get some impartial advice. It is important that you appear in court on the date that is printed on the summons. If you can’t make it, contact them immediately to change the date. This is very important, because if you fail to show up, you will automatically lose the case by default. This article is for informational purposes only, and does not constitute legal advice. You should seek the advice of a licensed attorney for advice regarding your individual situation.

But remember that most debt collectors who call you are never impartial. The Fair Debt Collection Practices Act (FDCPA) was passed by congress in 1977 to protect innocent people from being abused through unfair debt collection practices.

For over 40 years, we have offered expert advice and counseling to people coping with debt. Beyond the clients we’ve helped directly, many more have benefited from our free financial education, housing counseling services, and other services we offer. If you are forced to make less than the minimum payment on one of your debts or you have to miss a payment altogether, call us for confidential one-on-one counseling and advice.

Melinda Opperman

About The Author

Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovate ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over 19 years experience in the industry.