University of Illinois Extension

Managing Your Debt: Deciding Which Bills to Pay First

Who Gets Paid First?

You are legally obligated to pay all your bills. If you can’t pay all of them, you must decide how much to pay to each creditor. One way is to divide the money you have available and pay every creditor a portion of what you owe. This may seem fair to you, but it doesn’t always work.  Each creditor must agree to reduce the amount they receive and extend the payment period. It also doesn’t take into account that some bills may be more important to pay than others.

To help you decide which bills must be paid immediately and which ones can wait, ask yourself these questions:

What will affect my family’s health and security the most?

Usually food, housing, utilities, transportation and medical care take priority. Unless you are planning to move to less expensive housing, keeping up with your mortgage or rent payments is essential to avoid losing your house or getting evicted. See Keeping a Roof Overhead for suggestions on what to do if you can’t make your mortgage, rent or utility payments.

If you need a vehicle to keep or get a job, paying the car loan or lease payment may be a priority. Missing payments on a car or truck loan can result in repossession since the vehicle is the security for that loan. If you lease a vehicle, check your lease for penalties that result from default or early termination of your lease. According to Illinois law, you will also need to carry minimum car insurance.

Be careful about dropping your medical insurance even though money is tight. If anyone in the family becomes ill, uninsured medical bills could be devastating. If you’ve lost your job and had medical insurance through your employer, you should receive a notice about continuing your coverage. If you can afford to pay the premium, continuing the insurance is generally a good idea, especially if someone in your family has an existing medical condition that requires care. Often the only way to avoid restrictions for a pre-existing condition is to maintain coverage with an existing insurer.

What will you lose if the bills aren’t paid?

In addition to your house or vehicle, other property can be lost if payments are not made. Check furniture, appliances, boats, recreational vehicles, or electronic equipment loans to see if the item is security for the loan. If you aren’t sure which loans are secured, check the credit contract. Even if the loan is secured, repaying these loans may have a lower priority, especially if you can live without the item. 

How much do you still owe on the loan?

Determine how much you have paid on each loan and how much you still owe. If you have only one or two payments to make on a loan, it’s probably a good idea to finish paying it to get that debt paid. You may be able to return newer items or sell them to pay off the debt. If you choose to do this, you’ll still be required to pay the difference between the market value of the item and the amount remaining on the loan. Getting out from under some of your debts can also help to reduce your stress.

Do you owe child support, back taxes, or student loans?

Failure to pay child support can have serious consequences. You may be held in contempt of court, have your driver’s license revoked, or be ordered to jail. In addition, liens may be placed on your property, and you may not receive your tax refund. If your income has dropped sharply, you may be able to get the court order modified. Contact your attorney or county child support office for more information.

If you owe unpaid income taxes, the IRS may seize your paycheck, bank account, house, or other property. If you can’t pay the total amount due, contact the IRS to request a monthly repayment schedule.

You may be able to have payments on federal student loans deferred (no payments required) during periods of unemployment or financial hardship. But, you can’t qualify for a deferment once your student loan is in default. For more information on student loans, contact the Federal Student Aid Information Center at 1-800-433-3243. Or, go to http://federalstudentaid.ed.gov/ and click on Locate/Repay Your Federal Student Loan.

Do you have outstanding balances on credit card accounts?

Paying minimum monthly payments on your credit cards will keep your accounts current and avoid negative reports on your credit report. However, paying only the minimum—usually 2-4 percent of the outstanding balance—will not reduce your balance very quickly and extends the time it takes to pay off the balance.

Contact your credit card company and ask if they will lower your interest rate. Also, shop around and compare interest rates among companies at http://bankrate.com to make sure you are getting the lowest rate available to you.

Until your financial situation improves, don’t use your credit cards. Put them in a safe place, so you are not tempted to use them.

If you are having difficulty paying credit card debt, you may find it helpful to get assistance from a non-profit consumer credit counseling service. Contact the National Foundation for Consumer Credit (NFCC) at 1-800-388-2227 or http://www.debtadvice.org for an office near you.

The University of Illinois Extension “Credit Card Smarts” fact sheets will also give you information on choosing and wisely using credit cards. Go to http://cfe.ace.illinois.edu/ccs/.

Is a consolidation loan a good idea?

Lending companies want you to think so.  Making a single, lower payment may be easier and more manageable for you, but, it may take longer to pay the debt and total finance charges may not be more.

What about your credit report?

Late payment and nonpayment of bills are recorded on your credit report. They can damage your ability to get credit or increase the cost of credit. That’s why contacting all of your creditors immediately if you cannot pay your bills is important. If you can pay something on each debt as agreed, it’s less likely that your financial problems will be reported on your credit record.

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