Chapter 1 Choosing Which Debts to Pay First

First Steps to Dealing with Debt Problems Most people in financial distress will first want to deal with the worst thing that deteriorates financial situation. For example, if you are facing debt collector harassment, you should review chapter 8 and learn about ways you can stop this harassment. You might also want to know other measures such as negotiating with certain creditors to temporarily stop billing you. Then, you need to move quickly to the next steps—developing longer-term strategies to deal with debt problems.

First Steps to Dealing with Debt Problems Longer term strategies -Take a look at overall debt picture. All of these issues are discussed in various chapters of this book. Ch 2: will help you develop a budget. Writing down your expenses and income; Keeping track for a few months; and coming up with your budget or spending plan. Figuring out your budget is very important, but it does not tell you which debts you should pay if you cannot afford to pay all of them.

First Steps to Dealing with Debt Problems Ch 3: reviews what you need to know about your credit reports, ID theft issue. Ch 4: reviews the pros and cons of credit counseling and other “debt relief” companies. Ch 5: covers “credit cards.” Ch 6 & Ch 7: cover strategies both good and bad if you decide you want to raise money or dig into your savings or assets to pay off your debts.

First Steps to Dealing with Debt Problems Ch 8: covers how to respond to debt collectors. Ch 9: reviews collection lawsuits --the likely consequences you will face if you decide you cannot afford to repay your lower priority, unsecured debts, including a discussion of what is likely to happen if you get sued.

First Steps to Dealing with Debt Problems Ch 10-Ch 13: review strategies to consider when you are behind on your mortgage debt. Ch 14: reviews evictions and other disputes with landlords. Ch 15, Ch 16, & Ch 17: review how to deal with utility terminations, automobile repossessions (car related debt), and seizure of household goods

First Steps to Dealing with Debt Problems Ch 18: covers student loan. Ch 19: covers tax debts. Ch 20: covers bankruptcy. Ch 21: covers a checklist: Making a financial recovery

Debts With Collateral are Top Priorities! Collateral is property that a creditor has the right to take if you do not pay a particular debt. The common forms of collateral are home, car, household goods, business property, bank account, or even wages. Collateral can take many forms. When a creditor has taken collateral for your loan, it has a “lien” on your property. Creditors who have collateral are usually referred to as “secured” creditors. They know that if you do not pay, they can take the collateral from you and sell it to get their money.

Which debts to pay first?: Unsecured vs. Secured Debt Secured debts: mortgages, car loans, loans secured by household goods. Unsecured debts: credit and charge cards; legal or medical bills, loans from friends or relatives, store, gasoline, and other merchant card charges. Review Ch. 9 (Collection Lawsuits) to understand the consequences you are most likely to face if you stop paying your lower priority debts. This will help guide your decision making, which debts to pay first.

Sixteen Rules About Which Debts to Pay First These rules will give you guide about what to do IF you cannot pay all of your high-priority debts: 1. Always pay family necessities first. 2. Next pay your housing-related bills. 3. Pay the minimum required to keep essential utility service. 4. Pay car loans or leases if you need to keep your car. 5. You must pay child support debts. 6. Income tax debts are also high priority. 7. Loans without collateral are low priority. 8. Loans with only household goods as collateral are also low priority.

Sixteen Rules 9. Do not move a debt up in priority because the creditor or collector threatens suit. 10. Find out whether you have good legal defenses to repayment. 11. Court judgments against you move debts up in priority, but often less than you think. 12. Government student loans are medium-priority debts. 13. Debt collection efforts should never move up a debt’s priority. 14. Threats to ruin your credit record should never move up a debt’s priority. 15. Cosigned debts should be treated like your other debts. 16. Refinancing is rarely the answer.

If You Can’t Pay All Your High-Priority Debts Your income may not be enough to pay your mortgage and car loan (high-priority debts). “If I cannot pay my mortgage, at least I will keep up with my credit cards (low-priority debts). This is a bad idea.” You need to try to negotiate with the creditor to accept partial payments on your high-priority debts. You have to be careful not to lose a home or a car or other valuable property.

Using Bankruptcy to Get a Fresh Start Consider bankruptcy as an option from the start of your “surviving debt” planning process. When you file for bankruptcy, most of your unsecured debts will be “discharged.” This means that your legal obligation to pay those debts will end even if you cannot pay. However, a secured creditor will eventually seize its collateral unless you make a plan to pay that debt. This difference in bankruptcy between unsecured and secured debts is another reason to make unsecured debts a lower priority.

Using Bankruptcy to Get a Fresh Start Bankruptcy can also be used to get a creditor to back off of aggressive collection efforts. If a creditor refuses to give you some time to get things together or refuses to accept small affordable payments, filing bankruptcy can take care of the problems. Sometimes just telling a creditor that “you are considering bankruptcy” - this will make that creditor more reasonable.

Feelings of Obligation to Particular Creditors In deciding your priorities, you may feel that some creditors are more entitled to repayment than others. These feelings should rarely be a factor in deciding which debts to pay first. Giving up the home to pay off a creditor for whom you have good feelings is too big a sacrifice. Explain the situation and ask for understanding. Before assuming that you need to use a particular creditor, look around; there may be others in or near your community who are available in emergency situations.

Feelings of Obligation to Particular Creditors Mental health counseling, family therapy, and marriage counseling may be useful for managing the stress of financial problems. Whatever course you choose, it is important that you remain aware of the additional stress you may be feeling … Keep in mind that better days will come. With careful planning to minimize short-term hardship and with some patience, you can put yourself in the best possible position to get a fresh start and to recover financial health.

Summary Which debts to pay first? What rules to follow? What if you cannot pay your important debts? When to file bankruptcy? How to deal with obligation feelings to particular creditors? How to deal with debt-related stress?