Choosing Which Debts To Pay First

By Ian Pelham

Prioritizing Debt

It is quite likely that if you are experiencing debt problems then you are finding it increasingly difficult to keep up with your monthly debt repayments. Your income can only go so far and only some of your expenses can be reduced.

This leaves you with no choice but to delay or not pay some debts. Once you determine that you can't afford to pay all of your debts as they come due, you will have to make some hard choices as to which bills you should pay first. Your home or apartment, your utilities, your car, and even your household possessions may be at risk.

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.

Many people opt to take on new debt to pay off old debt instead of delaying or eliminating certain debt payments. Very rarely is this a good idea. The option to refinance or take on new loans and when, if ever, you should do so is discussed in a later article.

The main thing to do with too much debt is to decide which debts should be paid first, which you can refuse to pay, and which you can delay for a period of time.

The most important creditor to pay is not necessarily the creditor who screams the loudest or the most often. Creditors who yell the loudest often do so only because they have no better way to get their money.

Of more concern are creditors who not only threaten, but actually can take quick action against your home, utility service, your car, or other important assets.

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

Your available resources should be used for the things most needed for your family - usually food, clothing, home and gas & electricity.

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 thing you should bear in mind when deciding which debts to default on and which ones to make a priority to pay, and that is the idea of 'collateral'.

Collateral is defined as a physical object stipulated as being used as an object of value which will be recovered in the case where non-payment of a loan takes place, usually your home (mortgage) or car (car finance).

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.