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.
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.
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.
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.