Choosing Which Debts To Pay First

By Ian Pelham

Prioritizing Debt

If you are having serious debt problems, you are probably having trouble keeping all of your debts up to date. You can only reduce some expenses, and available income can only be stretched so far.

In this situation you have no option but to delay, or not pay some of your monthly debt repayments as become due. There are hard choices to make about which bills you should pay first. This is especially difficult when you risk things such as your home, utilities, car and even your personal possessions.

Following the rules in this chapter may make the difference between keeping or losing important property.

Do Not Take On More Debt To Pay Off Old Debt.

A short-term fix can lead to long-term problems.

Many people opt to take on new debt to pay off old debt instead of delaying or eliminating certain debt payments. Very rarely is this a good idea. The option to refinance or take on new loans and when, if ever, you should do so is discussed in a later article.

Your main strategy in dealing with too much debt is deciding which debts to pay first, which you can refuse to pay, and which you can put off until later.

The creditor who makes the most noise most often is not necessarily the creditor you should pay back the first. Many times these creditors make as much noise as possible to intimidate you since they have no other way to reclaim their money.

More worrying are those creditors who make some noise but then very quickly take action to recover their money in the form of legal action to take away your home, car, gas, electricity, etc.

Pay off creditors who can take the quickest action to hurt you, not those who yell the loudest and call the most often.

Your available resources should be used for the things most needed for your family - usually food, clothing, home and gas & electricity.

It would be great if there was a recommended 'list' dictating the order in which your debts should be paid, but unfortunately there isn't. Your situation will be different to someone else's. The guidelines in this article should be used as reference points only as you make your decisions.

Debts with collateral are top priorities.

There is one thing you should bear in mind when deciding which debts to default on and which ones to make a priority to pay, and that is the idea of 'collateral'.

Collateral is physical property that a creditor has the right to seize should you default on your payments to them. Usually collateral takes the form of your home (mortgage) and your car when you take out a car loan.

A creditor may also have collateral in your 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.

Determine which of your debts are 'secured' and which are 'unsecured'.

It is very nearly always the best policy to pay off your secured debts first. Creditors with collateral are secure in the knowledge that they can take the collateral from you and sell it to get their money back. That is why they are called 'secured creditors'.

Creditors without collateral are often referred to as "unsecured." It is usually hard for unsecured creditors to collect what they are owed unless you pay voluntarily.

The idea that debts with collateral are the most critical may seem very simple. Unfortunately, it is difficult to keep this simple concept in mind when you are getting hassled by debt collectors trying to force you to pay your lowest priority debts.

It is extremely important to remember this concept as you make decisions about your financial future.

About the Author:

Ian is someone who has come through a very difficult time financially. He used credit debt consolidation to ease his situation markedly. Without good debt consolidation advice he would have certainly gone bankrupt.