Choosing Which Debts to Pay First & Legal Considerations
If you are facing serious financial difficulties, you may feel swamped by many types of debt and uncertain about what to do first. The order in which you pay your debts may make a difference in some cases, since some debts should have a higher priority than others. In general, priority debts include those that are attached to certain assets. This is because you could lose that asset if you fail to pay the debt. Other types of priority debts that are not attached to a specific asset include child support and federal student loans. You may also want to pay utility bills promptly to avoid losing access to those services. If creditors for lower-priority debts are pressuring you, you still should pay the higher-priority debts first.
One of the most important types of debt is a mortgage, since you could lose your home to a foreclosure if you default on the loan. In some cases, you can negotiate a loan modification with the lender, or you may want to sell your home and get rid of the mortgage if you are facing major financial trouble. Payments on a car loan are also critical for people who need a vehicle to get to work or school or to handle other important matters. If you fail to keep up with payments, the car could be repossessed. You may be able to sell the car and buy a cheaper car or a used car.
Paying child support also is important, not only to take care of your child but also to shield you from being held in contempt of court by violating a child support order. In some cases, people who fail to pay child support even face jail time. Similarly, losing access to electricity, heat, or other vital services could put you at risk in ways beyond your finances. You should recognize the big-picture implications of this situation and prioritize these debts.
Debts that involve the IRS may require prompt action. The IRS has substantial authority to collect on debts such as student loans or unpaid taxes. It could intercept your tax refund or take your paycheck or bank account. Consumers often can work out a repayment plan to resolve these debts. Like child support, they generally never go away, even in bankruptcy.
If someone receives a judgment in court against you, this debt may become a greater priority. This is because the creditor may be able to garnish your wages or levy your bank account if you ignore the judgment. Also, it may be prudent to pay off medical bills if you are receiving an ongoing course of treatment. In some situations, you may feel that credit card debt is important to resolve, even though you will not lose any assets unless the creditor sues you. Persistent credit card debt can result in significant penalties and harm your credit in the long term. Whether this is a medium-priority or a low-priority debt depends on the other debts that you owe and how much your credit report concerns you.
While you should pay off any debts that you can, some debts have a lesser impact than others. These may include loans from people whom you know personally. They likely will be less aggressive about collecting the debt because they will be sympathetic to your circumstances. Retail debt may not be a priority because failing to pay it may result only in the loss of your credit privileges, although a store technically could bring a lawsuit. In some situations, credit card debt also may fall into this category if you owe many types of high-priority debts.
Organizing Low-Priority Debt
Some people prefer to pay off their low-priority debts according to their interest rates, paying off debts incurring the most interest first. Others find that paying off their smallest debts first gives them momentum to then pay off the larger ones.