Debt can become a crushing presence in your life. The resulting stress is overwhelming when you simply cannot afford to make your payments. Running the numbers over and over again doesn’t help; the math never changes. Something has to give. Prioritizing which bills to pay first is difficult, but these tips should point you in the right direction.
Secured Versus Unsecured Debt
To understand which bill should be paid off first it is important to know the differences between types of debt. There are two basic forms, secured and unsecured. The fundamental distinction between the two is that property is used as collateral for a secured loan. Unsecured debt is not directly attached to property. In most cases, you will want to pay off secured debt first.
The property used as collateral for a secured loan can be claimed by the lender if you default on your payments. This means you don’t truly own what you purchase with a secured loan until it is paid off and you have a clear title. Some examples of secure debt are mortgages and car loans.
No collateral is given to guarantee the payment of the loan with unsecured debt. If you cannot continue making payments, no specific property can be taken by the lender. This doesn’t mean that liens cannot be placed against other property or garnishment of wages cannot occur. Credit card debt, medical bills, and other consumer bills are all types of unsecured debt.
Need Versus Want Should Play a Role
Of course, deciding which bill to pay is not always that easy. Many bills are for unsecured debt in the form of monthly charges for utilities, rent, satellite tv, and phones. All make our lives better, but some are things we need, and some are only things we want.
When money is tight, it’s time to trim the budget and making a list of non-essential items is a great place to start. Sure, it’s tough to see some of these go. But, the alternative can be worse. One hundred channels of programming don’t mean much without a home to watch them in.
How to Decide Which Bill to Pay First
Given what you now know about debt, here is a good game plan for attacking your monthly bills when money is tight.
Basic Needs Come First
We all need a few things to survive. Food and shelter are at the top of the list. Your mortgage needs to be paid as do associated taxes and insurance. A home is not much use without gas, water, and electricity so pay those also. Establish a basic food budget that meets your needs without unnecessary extras and stick to it. Include non-food items that you need to live, like toothpaste, toilet paper, and soap.
It Can Be Hard to Work Without a Car
Make your car payments and keep current on the insurance if you need a car to get to work. This includes title loans you may have taken out. It might be tempting to drop the insurance but it is required and you don’t want expensive insurance assigned to you by the state or be personally liable for any accidents.
Meet Your Legal Obligations and Pay Taxes
Keep current with debt owed to the courts including child support payments. Also, pay your income taxes. The penalties are stiff, and you don’t want to end up owing far more if delinquent.
Address Secured Debt
Make sure you are addressing your secured debt. Defaulting on loans of this type will lead to repossession of property. Consider selling unessential property and settling the debt if possible.
Manage Your Unsecured Debt
If you still have money in the budget, address your unsecured debt next. Many credit cards allow you to pay a low monthly minimum, and often doctor’s bills can be negotiated down when financial hardship is involved.
Convenience and Entertainment Are Last on the List
Continuing to pay for items that are solely for entertainment or convenience when you are struggling to pay creditors is a bad idea. It shows you still have money left over after prioritizing other bills and you are not budgeting wisely. One phone is necessary for emergencies, but unlimited data on phones for everyone in the family may not be seen the same way.
If you prioritize your bills, but still cannot meet your monthly obligations while struggling to provide the essentials for you and your family, give us a call to discuss how to achieve relief from your debt.