Debt Rules

These debt rules apply figuring out which debts to pay first.

Top Priorities:

  1. Always pay for your family’s needs first. This include food and unavoidable medical expenses, co-pays and medicine. It does not include old medical bills.
  2. Pay housing related expenses, such as rent and mortgage. If you don’t use an escrow account to pay your taxes and home insurance, pay these as well. Remember to save monthly for these items, so you’ll have the full payment when it is due. Pay any Homeowner Association (HOA) fees or lot/space rental for manufactured homes. You don’t want to jeopardize your home because you failed to pay these fees. If you don’t pay these fees, you can very well lose your home. If you are in serious financial trouble that forces you to move to a less expensive home, stop paying the mortgage payments and use that money to pay for your monthly needs. You will most likely lose your home in foreclosure or via a short-sale. Remember that any forgiveness of debt is taxable. The bank is going to send you a Form 1099 at year’s end showing how much debt was forgiven and you will have to include this amount as income on your return.
  3. Pay your utility payments, even if it’s just the minimum. Also, ask your utility company if they offer any type of assistance to help with your utility payments. Make sure you turn-off items you are not using. Avoid wasting water, electricity, and gas. Turn down your heater in the winter and turn up your air conditioner in the summer. Use blankets to stay warm at night or jackets during the day. Wear light clothes and shorts in the summer.
  4. If you have car payments, pay those too. Consider selling your car if your payments are too high. This should also lower your insurance payments. If you have two cars, try to sell one. Less cars mean less insurance, repairs, gasoline, and car registration fees. Use public transportation or ride-sharing. Walk or ride a bike whenever you can.
  5. If you have child support payments, you need to pay those. These do not go away. Failure to pay them could cause serious problems and even lead you to prison.
  6. Pay any income tax debt. You need to pay any incomes taxes that you owe and which are not deducted from your wages. Make sure you timely file your income taxes, even if you don’t have the money to pay any balance that is due. The IRS has many collection rights than do others especially for failure to file.
  7. Pay your student loan debt. These are the worst type of debt you can have. They are not dischargeable in bankruptcy and if you die and have a co-signer, they become responsible for the debt.

Low Priorities:

  1. Loans without collateral. These include most credit card debt, professional fees, e.g. doctors, hospital bills, attorneys, open accounts with merchants, and other similar debt. These are low priority, as you have nothing pledged against the debt. However, you do need to pay them back once you are out-of-debt. You incurred the expense, so you need to pay for it.  “The wicked borrows but does not pay back, but the righteous is generous and gives;” – Psalm 37:21
  2. Loans with household goods pledged as collateral. A creditor sometimes has you pledge a household good as collateral on a loan. If you are unable to pay this debt, it is rare that the creditor will seize these, as they have a low resale value. Again, when you do get to a position where you are able to pay these debts you should.

Other Rules:

  1. Don’t move a low priority debt up because you are threatened with a lawsuit. Oftentimes, they don’t sue. If they do, it takes awhile for them to be able to seize the property and much of your property may be exempt from seizure. Your high-priority debt, on the other hand, is subject to foreclosure, eviction, or seizure /repossession.
  2. If you purchased something and find that it’s defective and you refuse to pay, the creditor may be asking for more than what he’s entitled. Seek legal advise for these issues, especially if it involves your home.
  3. If you are sued and lose, the judgments bring the priorities up, but often less than you might think. When the creditor gets his debt moved up, he can now enforce the judgment by asking the court to seize a portion of your wages, property, or bank accounts. Your state law determines the seriousness of  this threat, as does the value of property and your income. It might be that all of your property and income are protected under state law. You are in essence “collection proof”. Your income and assets are free from seizure. However, once your financial situation gets better, you’ll have to worry about the judgment. If you are not “collection proof”, you need to evaluate whether the consequences of not paying the debts are worse than paying the debts. Bankruptcy might have to be considered. As a Christian, you should always keep Psalm 37:21 in your heart and pay back those debts when you are able, even if they were discharged.
  4. Never let threats by collectors force you to move up a priority. They will tell you that your credit score will be ruined. Guess what, if you’re delinquent on your payments, your credit score and credit are already ruined. They have already reported the delinquency to the credit bureau.
  5. If you have not heeded my past advice on not co-signing or co-signed before reading my posts, then you need to figure out where this debt falls under, low or top. If you’ve pledged your home or car, then it’s a top priority. If you have not put-up these items, then it’s a low priority. If others have co-signed for you, you need to let them know about your financial problems. In this way, they are prepared and can figure out what to do.
  6. Don’t use refinancing as a get-out-of-debt measure. If you are in unsecured debt trouble (low priority debt) and you refinance your home to get rid of this debt, you have now turned a low priority debt into a high priority debt. Also, if you have not addressed your spending problems or living beyond your means problem, you are going to fall right back into credit card debt.
  7. Finally, don’t take out a loan from your retirement account to pay off debt. You are robbing from your future. For more information on retirement loans read this post.
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