It can be a crushing feeling knowing that you have more debts than you can pay with your current income. Before considering drastic actions such as credit consolidations or even bankruptcy, take a close look at your bills and how they can be prioritized. You may find the situation is more manageable than you thought.
The first step is to take a hard look at your continuing expenses. If you often spend more than you earn, it does not matter how well you prioritize your bill payments. Check your expenses and determine what are truly needs versus wants. Cable TV is nice, but it cannot come at the expense of food or medicine. (There are now great, low-cost internet TV options like Netflix available for $7.99 per month.) Formulate a budget with your new priorities, and stick to it.
Next, consider which of your debts are secured vs. unsecured. Secured debts mean that the creditor has some form of collateral that they can seize if you fail to pay your bills – such as your house and your car. Unsecured debts are debts without collateral, like your credit card bills.
Finally, consider any debt that may not be secured with collateral but that could cause loss of a need – for example, failing to pay child support or income taxes can have serious repercussions and even cost you jail time.
With that in mind, here is a proposed order of priority to help you dig out of your debt. You can juggle them a bit within categories, but the main rules are: necessities first, secured debts and other loss-related debts first, unsecured debts last.
- Necessities – Food and healthcare needs cannot be ignored. Take care of these expenses first. A good budget can help you get the most out of your dollar.
- Housing Costs – This includes not just mortgage payments but also property taxes, homeowner's insurance and utility costs. It does not do you any good to pay your mortgage if the house is unusable due to your utilities being disconnected.
- Legally Supported Expenses – Things such as your income taxes, child support, and other court judgments must be dealt with next (and arguably even before housing costs, if you are in imminent danger). These expenses can cause loss of property through liens or seizures, or loss of freedom through incarceration.
- Car Payments – If your car is necessary to maintain your job, it's next on the list — including not just loan or lease payments but also insurance. If you can use public transport or carpool, you may reduce this in priority – but do not just let your car be repossessed. Work with your creditor; they would rather help you with making your payments than take away your car.
- Student Loans – Defaulting on student loans can have serious repercussion such as garnishing of tax refunds. While your diploma will not be taken away, you should probably consider this higher priority than unsecured debt.
- Unsecured Debt – Start attacking this in the order of highest interest rate first, typically credit cards. If you have to, contact the creditors to seek alternate payment terms. They may be willing to work with you.
You probably did not get in this situation quickly and it will take even longer to get out of it – but if you stick with your plan and keep a firm line on needs vs. wants, you can eventually get out of the hole and experience the relief of not having more debt than you can manage. Remember that your eventual success is going to have more to do with controlling expenses than the order in which you pay your bills.