Paying off Debts: Who to Pay First?

Many individuals find themselves in debt not just to one lender, but to various lenders who have provided them with a wide variety of financial products and services. When everybody demands to be paid and there is not enough money to go around, who should get paid first? Is there a specific chain of command to follow when repaying debtors, or does it depend more on your unique situation?

The answer, of course, is never completely straightforward and in this case we recommend that you do a bit of both. Experts recommend some general guidelines as to the order of paying down debts, but your personal circumstances certainly should play a role in dictating which creditors deserve your money before the others.

General Guidelines

High Priority

No matter what your debt situation looks like, your number one financial priority each month needs to be (1) paying for basic necessities. Regardless of any other important costs that need to be paid, your family’s basic needs must be met first. Not even any creditor would argue with that (hopefully!).

Next, most experts assert that (2) making your mortgage or rent payment should be your next priority. Keeping a roof over your head definitely is important – but you should consider carefully at this point whether or not that roof is, in fact, the best roof for your situation.

If you have a mortgage and you want to keep your home, then you had better make those mortgage payments. But if you are struggling with debt elsewhere too, then consider the impact that your mortgage payments are having on your overall financial situation. Is it possible that the home you have purchased is outside of your means? Is downsizing a possibility?

If you do not intend to stay in your home anyway and therefore do not care if you are not able to keep it, then perhaps search for another housing option and stop putting such a large chunk of your monthly income into mortgage payments.

Nonetheless, the majority of people either are unable or unwilling to cut their housing costs, so mortgage/rent payments are considered very high priority. If you are determined to stay afloat in your debt while maintaining a mortgage, then contact your lender directly to come up with a payment plan for your difficult situation.


Medium Priority

(3) Other secured loans should be next on your list of priorities, assuming that the property you have attached as collateral is important to you. If you are making payments on an auto loan for a car that you need, for example, then paying off this debt is of high importance.

Of course, in this area too as is the case with mortgages, you should look for opportunities to cut back on your costs. It is understandable if you cannot get around without a car, but is the car that you have within your means?

Secured loans, for our purposes, refer only to loans with significant valuable property attached. Loans that have household goods attached, such as valuable jewelry, should be considered unsecured loans in this case and generally as lower priority. There is very little chance that these objects actually will be taken as payment because they lack much market value.

(4) Debts that are considered obligatory, such as income taxes, child support, and student loans (arguably to a lesser extent) also should be a priority. These debts will not go away, and you will be held accountable either sooner or later. Failure to pay could even result in jail time, such as is the case with child support. In other words, you want to pay these if at all possible!

Low Priority

(5) Your remaining unsecured loans, such as credit cards, generally are considered low priority. While the attached interest rates may be sky high, you have little choice if the “higher” priority debts listed above really are of higher priority for you.

Of course, if you are able to make payments on unsecured debts while paying down the others, then you will want to target those that hit you with the highest interest rates and fees first.

If you have not already done so, you might want to consider consolidating your unsecured debts as this time via a debt consolidation loan. This can help to simplify finances, a welcome relief when juggling multiple debts.

Taking your Situation into Account

The general guidelines listed above are just that – and your priorities might be quite different. You have many different aspects of your situation to consider, preferably with a debt expert, to decide how exactly to pay down your debts. As a place of departure, you will want to consider:

• Which products and services are the most important to you? If it really is more important to you to keep your car than your home, then that is a legitimate response and your payments should reflect this.

• Which lenders report your account to the credit bureaus?

• Which products and services do you need to keep, which would you like to keep, and which do you not care if you keep?

• What does your financial future look like in the both the short-run and the long-run if you decide to pay off your debts in any particular way?

If you are not yet having trouble paying your debts but anticipate difficulty in the near future, then you should contact your creditors immediately to warn them ahead of time. Be honest, and tell them exactly how much you afford to pay, not how much you think they want you to pay. It never is too early to come up with a repayment plan, both with individual creditors and with your family.


Who Not to Pay First

While the exact order by which you choose to pay your creditors is up to you, we can say with some certainly exactly who you should not pay first, at least not without further reason: those lenders who bother you the most for payment. Irritating you with calls or letters does not make a company any more of a priority in comparison to your other debts, nor does simply being the company to whom you owe the most.

If one of your creditors obtains a judgment against you in a lawsuit, this will make paying them off a bit more of a priority than otherwise, but still probably not to the extent that you might think. Certainly such a debt cannot become more of a priority than basic necessities, and probably not more than mortgage/rent payments and other secured debts either. If you are unsure about how much “weight” to give to any particular debt, speak with a debtors’ attorney or credit counselor.

Who Not to Pay at all?

In rare cases, there are some debts that you probably should not pay at all. One specific type of debt that you almost certainly should not pay, definitely not without the assistance of a debt expert anyway, is anything for which you have a legal defense against paying.

If your debt stems from the purchase of a product that came to you defective, for example, or if the lender is trying to collect more from you than you owe, then you should not pay and should contact an attorney.

You almost definitely do not want to make a payment on a debt on which the statute of limitations is about to run out either. A statute of limitations is a period of time following the date of the last activity on an account, during which a creditor might successfully sue for repayment of the debt. Once the statute runs out, you have an absolute defense in court against paying.

Let us say, for example, that the statute of limitations on your debt is 10 years. If you have not made a payment for 9 ½ years but then are pressured into making one, the statute of limitations will start over again from day one and your creditor will have plenty of time to sue for payment.

Conclusion

By using the guidelines above and taking an extensive and honest inventory or your expenses and priorities, you can decide on your best plan for paying down debts. You cannot pay everyone so some decision has to be made – just make it work for you. Speak with a credit counselor or a debtors’ attorney about any concerns you may have, or consider debt management if you feel that you realistically cannot pay off your debts.