Drowning in Debt: What Debts Should You Pay First?

24 Nov Drowning in Debt: What Debts Should You Pay First?

Most agree that the United States is headed for a recession (if not already there).  When interest rates rise, jobs are lost, and the bills mount up, what can a consumer do to control their debt?   The National Consumer Law Center (NCLC) has published “Guide To Surviving Debt” to aid consumers.   The  publication is for consumers who are already in financial distress or see that they are ended for financial distress. The authors recommend that the consumer sit down and prioritize their debts, making hard choices on which to pay first if there is not enough money to pay on all of them.   Debts with collateral are the top priority.  Collateral is property that the creditor has the right to seize (or take back) if payments are not made.   Examples of collateral which secure debts are mortgages, cars, or perhaps household goods.   These are called secured debts.   Debts which are not secured by any property are unsecured debts.  Examples of unsecured debts are medical bills, credit cards, personal loans, gasoline card charges, or department store charges.

NCLC has 16 rules about which debts to pay first:

1.  Always pay family necessities first.

2.  Next pay housing related bills.

3.  Pay the minimum necessary to keep the utilities on.

4.  Pay car loans or leases if you want to keep the car.

5.  Pay child support or spousal support.

6.  Pay income tax debts.

7.  Pay unsecured debts next.

8.  Pay debts that are secured with household goods.

9.  Do not move the debt up to a higher priority just because a creditor threatens to sue.

10.  Do not pay debts if you have a good legal defense to repayment.

11.  Court judgments may move debts up to higher priority.

12.  Student loans are medium-priority debts.

13.  Debt collection efforts should never move a debt’s priority to a higher priority.

14.  Threats to ruin your credit should never move a debt’s priority to a higher priority.

15.  Co-signed debts should be treated just like any other debt.

16.  Refinancing is rarely the answer. 

The folks at National Consumer Law Center give excellent advice.   Writing down your debts and prioritizing those debts can sometimes help consumers realize that their financial situation is so bad that they cannot pay even the high  priority debts.   If the collateral cannot be sold or the lifestyle is not being supported by the consumer’s income, drastic changes have to be made.   One option is to consult with an attorney to see what options you may have.   The National Consumer Law Center works closely with the National Association of Consumer Advocates (attorneys dedicating their practice to assisting consumers) and with the National Association of Consumer Bankruptcy Attorneys (attorneys whose practices primarily assist with consumer bankruptcies).  

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I'm a consumer protection lawyer in Oregon, working with people in Klamath; Lake; Jackson; Josephine; Curry; and Deschutes County. I speak regularly on bankruptcy and consumer protection issues nationwide.
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