Dollars & Sense

Sixteen rules for paying your bills

When money is tight, wise financial decisions are more important than ever. Providing necessities for your family is your top priority. All other bills are of lesser importance, regardless of what a creditor or debt collector may say. These 16 rules will help you prioritize your bills and expenses.

1. Pay family necessities first. Paying for food and essential medical expenses should be your first priority.

2. Pay housing-related bills. Keep up your mortgage or rent payments, if possible. If you own your home, real estate taxes and insurance must also be paid unless they are included in the monthly mortgage payment. Any condo fees or mobile home lot payments should also be considered a high priority. Failure to pay these debts could lead to loss of your home.

3. Keep utilities on. Whatever utility payments are necessary should be made if possible. Working hard to keep your house or apartment makes little sense if it is not livable because you have no utilities.

4. Pay a car loan or lease. If you need your car to get to work or for other essential transportation, rank your car payment just below food, medical expenses, utilities and housing costs on your priority list. You may want to pay your car payment first, if your car is essential to holding onto your job.

Stay current on your insurance payments as well. If you don't, your creditor may buy for you at your expense more costly collision and theft coverage with less protection. In most states, it is illegal not to have automobile liability coverage.

5. Pay child support. Child support debts will not go away. Fail to pay and very serious remedies may result, including prison.

6. Pay income taxes. You must pay any income taxes you owe that are not automatically deducted from your wages. You must file your federal income tax return even if you cannot afford to pay any balance due. Remember, though, if you have lost income due to a change of circumstances, your tax obligations will also be reduced. Pay only what is necessary.

7. An unsecured debt is a low priority. Consider most credit card debts, attorney, doctor and hospital bills and other debts to professionals, open accounts with merchants and similar debts low priorities. You have not pledged any collateral for these loans, and there is rarely anything that these creditors can do to hurt you in the short term. Many won't bother to try to collect in the long term.

8. A loan with household goods as collateral is a low priority. Sometimes a creditor requires you to put some of your household goods up as collateral on a loan. Treat this debt as a low priority. Creditors rarely seize household goods because they have little market value, it is hard to seize them without court process, and it is time consuming and expensive to use a court process to seize them.

9. Don't move a debt up in priority if a creditor threatens to sue. Many threats to sue are not carried out. Even if the creditor does sue, it will take a while for the collector to be able to reach your property, and much of your property may be exempt from seizure. On the other hand, nonpayment of rent, mortgage and car debts may result in immediate loss of your home or car.

10. Don't pay when you have a good, legal defense. If the goods purchased were defective or a creditor is asking for more money than they're entitled, you may have a legal defense for not paying your bill. You should obtain legal advice to determine whether your defense will succeed. In evaluating these options, remember that it is especially dangerous to withhold mortgage or rent payments without legal advice.

11. A court judgment boosts a debt's priority. After a collector obtains a court judgment, that debt often should move up in priority because the creditor can enforce that judgment by asking the court to seize your property, wages and bank accounts. Nevertheless, how serious a threat this really is will depend on your state's law, the value of your property and your income.

It may be that all your property and wages are protected under state law. If so, you should still pay this debt only after more pressing obligations. This is a good time to obtain professional legal advice if you have not done so already.

12. A student loan is a medium priority debt. Student loan debts should be paid ahead of low priority debts, but after top priority debts. Most delinquent student loans are backed by the United States, and federal law provides special collection remedies against you, including the seizure of your tax refunds and denial of future student loans and grants.

13. Debt collection efforts should not boost a debt's priority. Be polite to the collector, but make your own choices about which debts to pay based on what is best for your family. Debt collectors are unlikely to give you good advice. They'll urge you to pay debts that you should actually pay last.

14. Threats to ruin your credit should not boost a debt's priority. In many cases, when a collector threatens to report your delinquency to a credit bureau, the creditor has already provided the credit bureau with the exact status of the account. And if the creditor has not done so, a collector hired by the creditor is very unlikely to do so.

In fact, your mortgage lender, your car creditor and other big creditors are much more likely to report your delinquency than a debt collector who threatens you about your credit record.

15. Treat co-signed debts as your own. If you have put your home or car as collateral on a co-signed loan, paying this debt should be a high priority debt when the other co-signers fail to pay. If you have not put up collateral, treat a co-signed debt as a lower priority.

If someone has co-signed a loan for you and you are unable to pay the debt, you should tell your co-signer about your financial problems, so that he or she can decide what to do about that debt.

16. Refinancing is rarely the answer. If you're having serious money woes, you'll want to be careful about refinancing. Refinancing a loan can be very expensive, and it can give creditors more opportunities to seize your important assets. A short-term fix could lead to long-term problems.