Editorial Policy

If You Can't Pay All Your Debts, Prioritize Them

Erica Sandberg

August 14, 2012

QDear Erica,

I’m in financial debt, but I can’t pay all my bills because I’m only getting disability income. What is my best option? — Shirley

AHi Shirley,

The way you deal with your debts depends greatly on what kind you have. Before you do anything, prioritize them by importance. Here’s a list of common financial liabilities (roughly in order from most to least crucial) — and the consequences of not paying them.

  1. Mortgage. A home loan is most people’s largest obligation and the most critical to pay. If you default, you can lose the property, be out a tremendous amount of money and not have a place to live.
  2. Utilities. You’ll also need to be sure to keep the lights, gas and phone on. If these bills become debts, these vital basics could eventually be shut down.Ask Erica
  3. Car note. Owe a finance company or bank for your vehicle? Stop paying and the lender may very well repossess it. They don’t have to take you to court first, either. You could also end up owing a deficiency balance — the difference between what the lender gets for selling the car, and what you still owe.
  4. Student loans. Ignore student debt for too long, and you’ll wind up in default. Once that happens, you may experience harsh collection techniques, such as tax interceptions.
  5. Tax debt. If you’re in arrears to the IRS or the state, a lien can be placed against your home, and property can be levied (taken).
  6. Medical bills. In over your head with doctors or hospitals? If so, those bills will eventually land with a collection agency. Expect the phone to ring. A lot. They can also sue you for the amount owed.
  7. Credit card balances. If you don’t pay your creditors, they can increase your interest rates, add costly fees and close your cards down. Then they’ll send those bad debts to collection agencies or take you to court.
  8. Collection accounts. If some of your old credit card debts are already in collections, you’ve probably already realized that third-party collectors are often very unpleasant to deal with. But also keep in mind that if they don’t receive the money you owe, they have the right to sue you.
  9. Personal loans. If you’re in the hole to a friend or family member, that can strain — or end — your relationships.

If you let all these obligations go long enough, they can damage your credit — even utility bills and personal loans. Overdue utility bills can get sent to collection agencies. And personal loans can end up damaging your credit if the person you owe money to takes you to court and wins a judgment against you.

After ranking your debts from most to least critical, create a budget. Pare your expenses down to the basics so you can afford your essential needs. Then, plan to pay the creditors who are at the top of your list with any remaining cash.

You may not be able satisfy some debts in full or at all. In that event, contact those creditors to notify them of your situation and try to work something out. If you’re on short-term disability and will be back to work in the relatively near future, explain that you expect to be earning as usual by a specific date. Ask if you can pay a little, or even nothing, in the meantime. If you are on long-term disability and have no idea when you may be generating an income again, be upfront about it. Never make a promise you can’t keep to a creditor.

Now, if you can’t pay those you owe at all, now or in the future, your options for resolution include doing nothing or filing for bankruptcy. Yes, doing nothing could be an option. You may be judgment proof, which means that even if creditors sued you, they would get nothing because you have nothing to take. Or, you can file for Chapter 7 bankruptcy, which will wipe out such unsecured debts as numbers six through eight (and sometimes even nine). That can leave you with enough money left over to satisfy those that take top priority.

I wish you a quick recovery. Take care of yourself. As Ralph Waldo Emerson said, “The first wealth is health.”

Got a question for Erica? Send her an email.