Prioritizing Your
Debt Payments
Doctor
Debt
You have a stack of bills in front of you and you may not be
able to pay them all. Which debts are the most important? Many
people make the mistake of paying their credit cards before
their other debts. I argue that credit cards fall very low on
the list of debt priorities, especially if you have a mortgage
and auto loan. Learn why your mortgage should top your list of
debt obligations:
When you have several different types of debt – secured and
unsecured, credit cards and loans – you may have trouble
figuring out which of those debts are the most important ones
to pay. Choosing to pay the wrong debts could be costly, you
could end up in a worse situation than when you started. Here’s
a guide to prioritizing your debt payments.
Pay Housing Costs First
Your mortgage payment is at the top of your debt
priorities. That includes second mortgages, home equity loans,
and home equity lines of credit since there are all attached to
your home. If you default – fall behind – on your mortgage
payment, the bank foreclose on your home and auction it off to
the highest bidder. If the bank sells your house for less than
you owed on it, the bank can still come after you for the
difference.
That’s not the only reason you should focus on your mortgage
payment. If you default on your mortgage, your credit score
will drop and you could have trouble renting a home.
Property taxes. If you fail to pay your property
taxes, you can have a tax lien placed on your home. The bad
thing about a tax lien is that you still owe your mortgage even
if the taxing authority takes possession of your property. Not
only will you owe back taxes, you’ll also owe the mortgage.
Homeowner’s insurance isn’t necessarily a debt, but
it’s important that you continue to pay it because the
insurance company will cancel your policy if you fall behind on
your payments. If that happens, your lender will purchase
insurance for you and simply add the premium to your mortgage
payment.
Secured Debts Before Unsecured Debts
An auto loan payment is almost just as important as a
mortgage payment for the same reason. Your auto loan is tied to
your car, an asset you use to get to and from work. If you fall
behind on your auto loan payments, your lender could repossess
your car, auction it off, then send you a bill for the
difference.
Taxes
Federal income taxes are important, especially if you
have assets the IRS (Internal Revenue Service) can take. The
IRS can place a lien on your assets and even take possession of
them if you don’t pay your taxes. Assets the IRS can take
include your house, car, boat, RV, bank account, rental income,
and interest payments. They can also garnish your wages and in
some states, this is grounds for termination.
State income taxes should also be high on your priority list
of debts to pay. Like the IRS, your state revenue department
can sue you, garnish your wages, and place a lien on your
assets.
Federal Student Loans
If you fall behind on your federal student loan payments –
like a Direct or Stafford loan – the IRS can take your tax
refunds to cover the payments. Your wages might be garnished
and you could lose your ability to get other federal loans
including student loans and housing loans.
Medical Bills
Pay your medical bills, especially if you need to continue
to use that doctor or facility. Unpaid medical bills don’t slip
through the cracks. Your hospital may spend some time trying to
get you to pay the debt. After that, they may send your account
to a collection agency or even sue you for the unpaid debt. The
lawsuit could result in a wage garnishment or lien on your
assets. You may not be able to use that physician again until
you’ve repaid your bill.
Unsecured Debt
Prioritize your credit card debt and other unsecured debt in
order from highest interest rate to lowest interest rate. If
you fail to pay your credit card debt, the credit card company
will first try to get you to pay the debt. Then, it will
contact a debt collector. Finally, the card issuer may sue you
and ask the court for permission to take one of your assets or
garnish your wages.
Notice in the list of all the people you could owe, the
credit card companies come at the end of the list. Though you
don’t necessarily want to face one in court, you have a lot
more to lose when you fall behind on other debts.
by Daron Vchulek - 10/2/2009
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