For any family facing financial distress, deciding which debts to pay first is a constant issue every month. When you have limited income and more debt than your budget can handle, you have to start making hard choices in order to keep your family afloat. So how do you decide which debts to pay first and how to pay everything back efficiently?
The first debts you should always pay every month are anything that has collateral attached to it. A secured debt offers some kind of collateral that can be repossessed if you fail to pay. This makes these debts the most important to keep current, so you can avoid losing assets. It’s especially true when you’re talking about debts like your mortgage and monthly car payments, since you can’t afford to lose these if you want to maintain your lifestyle. In addition, you may also wish to include your HOA payments in this category, as an HOA can also take your home if you fail to pay them each month.
Following this, you should also pay anything that could land you in jail if you don’t pay. Court order payments, such as child support and alimony, are required by law and you can get arrested if you don’t pay and the other party makes a complaint. If the payments are too high, you need to go back to the courts and ask for an adjustment—especially if a new job or reduced hours at work has caused a decrease in your income level.
You should also pay any debts that cannot be discharged by bankruptcy, such as government backed student loans. These kinds of debts cannot be discharged, so you may be on the hook for any penalty payments or finance charges you incur for not paying on time.
For most consumers, the only debts remaining after this should be credit card debts. These are the last debts you should pay, because they are unsecured. This means as much as creditors can call constantly, harass you, make you feel bad, send you to collections and even sue you, they cannot take your property or assets without a court order. In addition, as unsecured debts, credit cards have a lot more flexibility in how you pay them off when you need debt relief.
Unlike other debts, credit card debts can be consolidated. This is where you combine multiple unsecured debts into a single, low monthly payment at a much lower interest rate. The right consolidation option in the right circumstances can reduce your monthly credit card payments by as much as 50 percent. This usually goes a long way in helping consumers get their finances back on track when they are having trouble.
You should run some calculations. If more than 15 percent of your monthly income is going to credit card payments, then you are spending too much of your budget on credit card debt and are likely facing distress. If so, you need to contact a nonprofit credit counseling agency to discuss your options for debt relief with a certified credit counselor. They can evaluate your debts for you and help you find the right option for consolidation so you can get on the right financial path.