Essential Debts Verses Non-Essential Debts
The goal here is to determine which debts, if any, need to be addressed immediately and in what order of priority. You do this by making a full accounting of those debts that are essential to keeping you and your family fed, clothed and sheltered.
For example, you may be paying a $389.00 monthly car payment, plus another eighty-five dollar a month in car insurance. Depending on your current situation, you may not need a car, but the chances are you will in order travel to work or find a job.
If you have an old car that works and has no debt attached to it, use it, don’t sell it. You might have a relative or friend that will lend you a car they no longer use. It might make sense to get rid of the high payment in exchange for something much less expensive. Depending on where you live, public transportation might be a feasible alternative. You can use UBER/LIFT for short trips and rent a car for long ones. There are many possible options available to you.
Prioritizing Your Debts
Once you determine which debts you absolutely need to keep (which may not include your $100.00 cable television subscription), the next step is to create a budget. Without knowing what is essential debt verses non-essential debt, you have no way of knowing how to prioritize payment of your debt, and it is precisely this uncertainty that will prevent you from making a realistic budget and which will lead you into making uninformed financial decisions.
So gather all of your bills in one location. Get a pad, calculator and a bunch of sharp pencils. Take some deep breaths. You are about to make some very important decisions. Specifically, prioritizing your monthly debts and expenses based on which debts and expenses are absolutely necessary to survive the financial storm.
Your Home Mortgage
Pay your mortgage first. This includes property tax and insurance since the lender may hold you in default if these are not paid. The immediate goal is to keep a roof over your head while you are figuring out what your financial strategy will be. You can usually hold off paying a mortgage payment or two without being in immediate danger, but no more. Also, be sure to keep that amount in reserve should you decide to keep the home and need to make those mortgage payments or you decide to relocate to a less expensive rental, in which case you will need that money for relocation and future rental payments.
Letting your home fall into foreclosure may be the best alternative, but you will not know that until you see the complete picture, compare options and formulate your action plan. For example, if you do choose to give up your home through default, depending on your specific situation, you may be legally allowed to live in he home for many months before having to actually vacate. You do not want to vacate prematurely. Stay in the home until you legally must vacate. You will need the money you will be saving.
Pay the minimum to maintain service and avoid disconnection. Many municipalities have programs you can apply for to receive utility bill discounts or even suspend your payment obligations for a certain time period. Call your utility provider to see if this is an available option for you. You can also look up the utility bill discount resources in your state.
Failure to pay court ordered child support, can have serious civil and criminal consequences. This is one debt you really need to give special consideration to. If you cannot make the payment, try to work out a child support modification plan, with your former spouse.
You must pay income tax. If you are unable to pay your taxes you still need to file your tax returns. You must file no matter what. You can always make payment arrangements. In fact, if you filed and qualify under IRS rules, you may be able to request an extension, after the extension runs out, the IRS can give you up to four-months to pay what you owe in installment payments. Even the IRS knows you can’t get someone to pay what someone doesn’t have. Your state tax system is usually not so accommodating. For example, California is known to have a very aggressive collection policy. Find out what kinds of property the government can attach on unpaid taxes.
If you are paying on a money judgment that was lawfully filed and perfected, while technically, the judgment creditor can levy on your bank accounts, garnish wages, you should first determine if your state has enacted consumer protection laws that prevent creditors from financially collecting depending on your income and assets. If not, your creditor might have to cease and desist from making collection efforts based on the fact you are legally considered collection-proof – at least until you’re financial circumstances change.
Government Student Loans
Government student loans are not low-priority debts. In fact the law allows the government to have priority over other types of loans even in bankruptcy. This includes garnishing your tax refunds, preventing you from obtaining new student loans, and under certain circumstances they can even tap into your Social Security. Notwithstanding these extreme collection measures, government lenders will give you an opportunity to defer payment or otherwise allow you to make affordable payments.