Choosing Which Debts To Pay First

By Ian Pelham

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.

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.

Instead of delaying or eliminating certain debt repayments, you may be tempted to take on more debt to repay old debts. This is generally a bad idea. When you should and should not refinance, consolidate or take out new loans 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.

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.

The creditors to be the most concerned about are those who quickly take action against your home, car, utility service or any other vital assets you may have.

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

You should direct your limited resources to what is most necessary for your family -- typically food, clothing, shelter, and utility service.

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'.

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 notion that 'secured debts' are the ones most vital to pay is a fairly simple one. The problem arises when you have a constant stream of debt collectors harassing you to pay unsecured debt, often distracting you from keeping the 'secured debt first' rule in mind.

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.