Which debts should you pay first?

Rule #1: Prioritize Debts Whose Non-Payment Immediately Harms Your Family

Non-payment of certain debts have sudden and dire consequences for your family.

Deal with these debts immediately—either pay these debts first or otherwise follow this advice on how to manage these debts.

Never pay smaller, low priority debts just because you cannot keep up with high priority debts—“If I can’t pay my mortgage, at
least I will keep up with my credit cards.” This is a bad idea. If you don’t have enough money to make full payments on high
priority debts:

  • Try to negotiate with the creditor to accept lower payments or
  • Save the money to be used later to get caught up, to cover the initial costs of moving to a new residence or to pay for another car if your car is repossessed.

High Priority Debts Include:

  • Court judgment debt. You have been sued on a debt and a court has ruled for the creditor. The creditor has rights to seize part of your wages, bank accounts, and even your home or other property.
  • Criminal justice debt. Non-payment of debt arising from a criminal proceeding, (such as fines, fees, and costs) can lead to immediate loss of your driver’s license, loss of income or assets, or even incarceration.
  • Automobile loans or leases. These can result in a creditor repossessing your car after you miss only a few payments. This is high priority debt; particularly if you need your car to get to work or for other essential transportation.
  • Rent payments. Swift eviction can result if you do not keep up these payments.
  • Utility bills. Non-payment of utilities can lead to termination of gas, electric, water, and other utility service.
  • Child support debts. These will not go away and can result in very serious problems, including prison, for non-payment.

Debts That Will Become High Priority.

Other debts can be put off for a few months, but at some point, they will come just as high priority debts as those detailed above, and then must be addressed immediately. Most notable are:
  • Home mortgage delinquencies (including non-payment of a debt to buy a manufactured home). Miss a month or two and you are unlikely to face a foreclosure, but if you get behind by enough months, you face loss of your home. In some states this can happen without a court hearing.
  • Real estate taxes. If you do not have an escrow account with your mortgage lender you are responsible for paying your own property taxes. While non-payment of property taxes will not result in an immediate loss of your home, at some point your home will be subject to a tax sale.
  • Federal student loans. These are not in default until you are nine months behind on your payments, but then you risk seizure of your tax refund and your Social Security or other federal benefits, wage garnishments without a court order, and denial of new student loans and grants.
  • Taxes owed to the IRS. Even if you do not pay your federal income taxes when due, always file your tax return on time, or file it by the deadline set by any requested extension. Then you can delay for a time paying taxes owed without serious adverse consequences. But at some point it will be critical to work out an arrangement with the IRS, because the IRS can seize your bank account, park of your paycheck and federal benefits, and even your home.

Low Priority Debts.

Lower priority debts should not be paid ahead of higher priority debts if this prevents you from appropriately dealing with high priority debts. Low priority debts become higher priority once you are sued in court on the debt. Some low priority debt include:
  • Medical debt, such as payments due hospitals, doctors, other medical professionals, dentists, and ambulance companies. This debt does not affect your credit rating for six months, is unlikely to involve high interest rates or late charges, and it could take a year or two before you are sued, if you are ever sued at all. Medical debt does not result in immediate loss of your property or income, unless you are successfully sued on the debt.
  • Credit card debt. You will not be subject to seizure of your bank accounts, income, or property unless you are successfully sued on the debt or there is a default judgement taken against you. Debt collection contacts can easily be stopped.
  • Debt owed friends and relatives. Non-payment is not going to harm your credit rating or result in lost property and wages, and you may not even be charged interest. Of course, you want to repay these debts, but your friends or relatives who lent you money are unlikely to want you to lose your home or car just to pay them back sooner.
  • Private student loans. These loans typically do not involve collateral, and special remedies available to the government to collect federal student loans do not apply to private student loans. However, private student loans are difficult to discharge in bankruptcy.
  • Debts you owe as a co-signer. If you co-signed for someone else’s debt and put your home or car as collateral for the other person’s loan, the loan is high priority. Other loans for which you are a co-signer but have put up no collateral are low priority. If others have cosigned for you, tell them about your financial problems so that you can make plans.
  • Deficiency actions after your car is repossessed. If a creditor repossesses your car and sells it for less than the amount you owed on the car loan, it may seek the difference from you, called a “deficiency”. This is a low priority debt because you have already lost the car, your credit rating has already been damaged, and the creditor can do little other than sue you. If you are sued, you often have solid defenses that prevent the creditor fro, recovering any deficiency. If the creditor prevails in the lawsuit, the debt becomes high priority.
  • Charge accounts or other debts owed to merchants, particularly if the merchant has not taken as collateral the goods sold.
  • Small loans even when they take household goods as collateral. Non-payment is unlikely to cause you to lose household goods collateral because creditors rarely seize them. They have little market value – a court order is usually needed to seize them. It is time-consuming and expensive to obtain that court order.

Source: National Consumer Law Center, Surviving Debt [50th NCLC Anniversary Edition], updated at www.nclc.org/library