Which Debts to Pay When You Cannot Pay Them All
Authored By: Montana Legal Services Association (MLSA)
If you cannot pay all of your bills and debts, you should think carefully about which ones should be paid first, last, or not at all. There are some general rules to follow when deciding which bills to pay first.
Which bills and debts should be paid first?
When deciding which bills or debts to pay first, the most important thing to remember is that the creditor who is the meanest or makes the most threats is not necessarily the one you should pay first. Creditors that don't have a guarantee of repayment (unsecured creditors) will often try to scare you into paying them first. However, the creditors you should worry about first are creditors who can take quick action against your home, utility service, car, or other valuable property.
What is secured debt and unsecured debt?
Secured debt is a debt that is secured or guaranteed by a piece of property. This property is called collateral. Loans to buy a car or home are good examples of secured debt. When you get this kind of loan, the lender (creditor) gets a security interest in the collateral. This means he can take and sell the property if you don't repay the debt. Secured creditors can be sure to get at least partial repayment of the loan because they have the ability to take and sell the collateral if you don't pay. You should almost always try to pay these debts first. If you don't pay them, you may lose valuable property.
Unsecured debt is debt that is not secured or guaranteed by collateral. In the case of unsecured debt the creditor cannot take anything from you without going to court first. Credit card debt, medical bills, and other loans without collateral are all examples of unsecured debt. The only way a creditor can collect this type of debt is by taking you to court. Creditors usually go to court as a last resort because it is expensive to do so. You should almost always pay unsecured debts after you pay secured debts.
I don't have money to pay all of my bills and debts. Which bills and debts should I pay first?
- Family necessities. Family necessities must be taken care of first. They include food and current medical care if your medical provider requires pre-payment. (Do not pay old medical bills first, unless you must in order to get current medical care.)
- Rent or mortgage payments. Keeping rent or mortgage payments current is important. It is also important to pay any real estate taxes or insurance fees that you are obligated to pay. Failure to pay these types of debts can lead to the loss of your home and the money you have paid toward the purchase of your home (equity).
- Utility payments. Utility payments are also important, especially during the winter months. If you cannot pay the entire bill each month, then try to pay the smallest amount needed to avoid disconnection of your services. Disconnection can lead to many problems, including eviction. If you get disconnected, you may have to pay a reconnection fee to get your utilities back. The Low-Income Energy Assistance Program (LIEAP) and Energy Share both help low-income Montanans pay their energy bills during the winter months. Both programs are run by the Rocky Mountain Development Council. For more information on LIEAP and Energy Share, call the Rocky Mountain Development Council at 406-447-1625. There is also additional information available on these programs here.
- Car payments. Car payments are important if you need your car to get to work or for some other important reason. Also, remember to keep current on your vehicle registration and auto insurance; failure to do so can lead to big debts if you get into an accident. If your car is not a necessity, then you should think about selling it and getting rid of the extra monthly payment.
- Child support and spousal maintenance (alimony). These debts won't go away and you can't get rid of them through bankruptcy. Also, government agencies that collect child support have more legal rights than other creditors to take your income and property. Unlike most other debts, you may be jailed if you intentionally fail to pay child support or spousal maintenance.
- Income taxes. You must pay income taxes not automatically taken from your wages. You should file an income tax return even if you can't pay the taxes you owe. If you do not file your tax return on time, you may have to pay expensive penalties in addition to any taxes you owe. When the government collects taxes, they have more legal rights than other creditors to take your income and property.
Which bills and debts should I pay next?
If you have student loans, usually you should pay those next. Government agencies that collect student loans have more legal rights than other creditors to take your income and property. You also can be denied new student loans and grants if you don't repay the old ones.
Which bills and debts should I pay last?
Unsecured debt, or debt not secured by collateral, such as credit card debt medical debt, should usually be paid last. The only way a creditor can collect on such a debt is by suing you in court. Usually creditors will only sue you as a last resort because it costs them so much money to do so.
Usually loans that use household goods as collateral should also be paid last. These debts are a type of secured debt, but usually the collateral is not as important as other bills or debts you need to pay. These debts should be paid only after more pressing debts. Also, creditors are hesitant to take and resell many household goods because of their low resale value.
What debts should not be paid?
You should not pay debts that you have a good legal reason not to pay, until you are legally forced to do so. If you bought something and believe you were cheated or deceived, talk to a lawyer about how to fight for your rights. Also, do not pay debts that you don't owe, unless you are legally forced to do so. Paying the debt can be an admission that you owe it.
I've been threatened with a lawsuit, should that change the priority of the debt?
No. Even though a lawsuit may seem scary, the threat of a lawsuit should never make you pay a debt before you pay for any basic necessity, including your rent or mortgage, utilities and car payments. Many times lawsuits are threatened but not carried out.
An unsecured creditor must sue you and win before he can take any of your money or property. If a creditor does win a court judgment against you, and it puts any of your money or property at risk, then this debt may take a higher priority. However, you should always pay for your basic necessities first.
What happens if a creditor gets a court judgment against me?
Even if a debt collector gets a court judgment against you, it does not necessarily mean you will be forced to pay the debt. The judgment gives the debt collector the right to take some of your wages and/or property. However, if you don't own much and don't earn much, the debt collector may not be able to get anything from you. There are federal and state laws that prevent creditors from taking a certain amount of your income and certain types of your property. If all of your income and property are protected by these laws, you are called "judgment proof." If you are judgment proof, there is nothing that the debt collector can do to collect the money you owe unless your financial situation changes.
Should I pay a debt because a creditor threatens to ruin my credit rating?
No. If a debt collector makes such a threat it is only because he has no other cheap way to collect the debt. The creditor may have already reported you to the credit bureau. Debt collectors only make threats like this in order to scare you into paying a debt that is difficult to collect otherwise. Do not let a creditor or debt collector scare you into paying less important debts first!
Should I pay a debt because I have co-signed on it?
Co-signed debts should be treated like your other debts. If you put up important property as collateral, treat it as a high-priority debt. If you didn't, treat it as a low-priority debt.
Should I take on new debt to repay my old debt?
It may seem that the best way to catch up on your bills and debts is to take on new debt in order to repay old debt. However, this can lead to long-term problems and is usually not a good idea. The best way to deal with too much debt is to decide which debts to pay first, which debts to pay last, and which debts to not pay at all.
However, if you decide that you must take on new debt to repay old debt, you should not turn unsecured debt into secured debt. For example, do not pay off your credit card debt with a home equity loan even if it lowers your monthly payments. If you can not pay your credit card debt, the creditor will have to sue you in order to collect any money from you. Even if they do sue you and win, they may not be able to collect any money or property from you. However, if you can not pay your home equity loan, you may lose your house and all of the money you have paid toward its purchase.
- The State Bar Lawyer Referral Service may provide you with contact information for attorneys who provide the type of assistance you are seeking, for a fee. You can contact the State Bar Lawyer Referral Service at (406) 449-6577 or montanabar.org.
- Montana Legal Services Association (MLSA) provides free civil, non-criminal legal help to eligible clients. Learn more about how to apply for free legal help in Montana.
Financial counseling can help you understand your financial situation and options. The Department of Housing and Urban Development (HUD) trains and certifies non-profit housing counselors across the country. Because of this, you can have confidence that a HUD-approved housing counselor is well equipped to help you understand and evaluate your options. HUD-approved housing counselors can give advice on credit issues, renting, foreclosures, defaults, and buying a home. You can find a HUD-certified counselor near you.