Prioritizing Debt



Chances are, if you're in trouble with debts you are finding it hard keeping on top of the payments for all your debts. Only some expenses can be reduced and your income can be stretched only so far.

You therefore have little choice but to either delay, or not pay at all, some debt repayments as they come due. In this situation you will be forced to think very hard about which payments you really should pay first. You risk several things such as your home, gas, electricity, car and even your household 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.

The main thing to do with too much debt is to decide which debts should be paid first, which you can refuse to pay, and which you can delay for a period of time.

It is easy to be intimidated by the creditor who screams the loudest for their money but they are not necessarily the most important creditor to pay. Many times creditors who scream the most for their money do so because they have no other way to get their money.

Of more concern are creditors who not only threaten, but actually can take quick action against your home, utility service, your car, or other important assets.

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

The money you do have should be used for the most important things for your family such as food, clothing, a roof over their heads and utilities.

Unfortunately there is no magic list of the order in which these debts should be paid. Everyone's situation will be different. The rules in this article should be used as a guide as you make these critical decisions.

Debts with collateral are top priorities.

There is one particularly important concept you should keep in mind while you are deciding which debts to pay first and which you may need to let go. This is the concept of "collateral."

Collateral is property that a creditor has the right to seize if you do not pay a particular debt. The most common forms of collateral are your home in the case of a mortgage (or deed of trust) and your car in the case of most car loans.

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'.

In nearly every case you should pay secured debts first. 'Secured creditors' are creditors who have collateral. They know that if you don't pay them back they can take the collateral from you and auction it off to try and recover their money.

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.