Prioritizing Your Debts to Establish What Order to Pay In

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Lebedin Kofman LLP

New York, NY

Practice Areas

Debt Settlement, Bankruptcy, Criminal Defense, DUI and DWI, Sex Crimes, Civil Rights

There are numerous things to consider when faced with the issue of debt repayment. Prioritizing the needs of you and your family is the most important step when determining which debts to pay. As a general rule, you should direct what limited resources are available to necessities such as food, clothing, shelter, utility expenses, and medical expenses. Always pay family necessities first. Second, keep up on you mortgage or rent payments. It is important to ensure that you and your family have a place to live. If your financial situation requires that you move to a cheaper residence, you may choose to stop paying the current mortgage or rent. If you do this, you should save that money you would have used for these expenses to funded the expected move. Utility expenses should also be paid if at all possible to ensure that you and your family have access to essential utility services.

Car expenses may also be paid if a car is necessary for work or for other essential transportation. Car payments should be made after food, housing, medical expenses, utility, and clothing costs are paid. If you do pay for the car, be sure to stay current on your insurance payments as well. If you do not, the creditor may buy insurance for you at a higher cost. If you can do without your car or one of your cars, this may help with debts owed elsewhere. If the car is not necessary, you could save on car payments, gasoline, repairs, and insurance.

Certain debts are of a high priority such as income tax debts or child support debts. Failure to pay child support could result in very serious consequences including prison for nonpayment. Additionally, child support debts do not disappear. You must pay any income taxes that you owe that are not automatically deducted from your wages. The government has special rights that are different from creditors especially if you do not file your tax return. However, if you have experienced a loss in income, your tax obligations will be reduced.

Loans without collateral and loans with only household goods as collateral are low priority. If a loan does not have collateral, such as most credit card, attorney, doctor, and hospital bills, the short term consequences are usually minimal. Additionally, those loans that use household goods as collateral are low priority because creditors rarely seize these items. Household goods usually have little market value and are not of use to the creditor.

During your repayment process, creditors may threaten to sue for payment of debts. Many of these threats are never acted upon. Depending on the type of debt, you do not have to move a debt up in priority because of the threatened lawsuit. However, in cases where the debt to be paid is rent, a mortgage, or a car debt, a lawsuit may result in the immediate loss of your home or car. In these cases, it is wise to move the debt up in priority or contact legal assistance to help with the potential lawsuit.

Debt collection efforts or threats to ruin your credit score should never move up a debt's priority. Debt collectors are intentionally aggressive because their goal is to make you pay your debts. It is unlikely that they will give you good advice and often debt collectors are most aggressive about debts that should actually be paid last. Additionally, in many cases where the debt collector threatens to report your delinquency to the credit bureau, it has already provided the credit bureau with the status of your account. For this reason, such threats should not be factored into what debts should be paid first. It is most important to pay debts in accordance with what is best for your family.

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