Deciding which bills to pay first
Sharon M. Danes, Extension Specialist and Professor — Family Social Science
Revised January 2016 by author.
When you don't have enough money to cover your family's basic living expenses and pay all your creditors, you face some difficult financial decisions.
It may be tempting to use credit cards, take out a home equity loan, or borrow money to pay bills. But taking on more debt is generally not a good idea. Unless your situation turns around quickly, it only puts you further behind and creates bigger problems. Instead, focus on cutting your spending and working with your creditors to reduce your payments until your situation improves.
When family income is reduced, your spending habits must change. The sooner you change, the more likely your financial problems can be lessened. Your family should be part of the decision-making process because their cooperation is essential to carry out the plans.
Sizing Up Your Situation
When your bills are more than you can pay, you need to contact the people to whom you owe money — your creditors — and explain your situation. Creditors are usually willing to work with you if you contact them before you get behind in your payments.
Before you can talk to your creditors, you need to take a careful look at your situation and make some decisions about how much and when you can pay each creditor. Answer these questions:
- How long is your present financial situation likely to last?
- How much income can you count on each month?
- How much money is needed to cover your family's essential monthly living expenses?
- How many creditors do you owe and what is the total amount you owe? Completing the worksheet "Debts Owed" can help you to get a clearer picture of what and how much you owe.
- What assets do you have that could be used to pay off your debt (for example, savings and items that could be sold)?
- What debts are the most important to repay first?
- What debts could be satisfied by voluntarily surrendering, or giving back, the item?
Who Gets Paid First?
You are legally obligated to pay all of your creditors. If you can't pay all of your bills, you must decide how much to pay to each creditor. One way is to divide the money available and pay every creditor a share of what you owe them. This may seem fair, but it doesn't always work because each creditor must agree to reduce the amount they receive and extend the payment period. This strategy also doesn't take into account that some bills may be more important to pay than others. To help you decide which bills must be paid immediately and which ones can wait, ask yourself these questions:
What will affect my family's health and security the most?
Usually food, housing, utilities, transportation, and medical care take priority. Unless you are planning to move to less expensive housing, keeping up with your mortgage or rent payments is essential to avoid losing your house or getting evicted. For suggestions on what to do if you can't make your mortgage, rent, or utility payments, see Keeping a roof overhead.
If you need a vehicle to keep or get a job, paying the car loan or lease payment may be a priority. Missing payments on a car or truck loan can result in repossession if the vehicle is the security for that loan. If you lease a vehicle, check your lease for penalties that result from default or early termination of your lease. Minnesota law requires you to carry minimum car insurance. For additional suggestions, see Meeting your insurance needs: Automobile Insurance.
Be careful about letting medical insurance slide when money is tight. If anyone in the family becomes ill, uninsured medical bills could be devastating. If you've lost your job and had medical insurance through your previous employer, you should receive a notice about continuing your coverage. If you can afford to pay the premium, continuing the insurance is generally a good idea, especially if someone in your family has an existing medical condition that requires care. Information on Affordable Health Care Act reforms in Minnesota can be found at this website: Minnesota Health Reform. This site provides links to health care exchange information. For additional suggestions, see Meeting your insurance needs: Health Insurance.
What will you lose if the bills aren't paid?
In addition to your house or vehicle, other property can be lost if payments are not made. Loans to purchase furniture, appliances, boats, recreational vehicles, and electronic equipment often include the item as security for the loan. If you aren't sure which loans are secured, check the credit contract. Even though secured, repaying these loans may have a lower priority, especially if you can live without the item.
How much do you still owe on the loan?
Determine how much you have paid on each loan and how much you owe. If you have only one or two payments to make on a loan, it's probably a good idea to finish paying it, getting that debt out of the way. You may be able to return newer items or sell them to pay off the debt. If you choose to give back the item, you'll still be required to pay the difference between the market value of the item and the amount remaining on the loan. Getting out from under some of your debts can reduce your stress.
Do you owe child support, back taxes, or student loans?
Failure to pay a child support order can have serious consequences. You may be held in contempt of court, have your driver's license revoked, have liens placed on your property, have your tax refund intercepted, or be ordered to jail. If your income has dropped sharply, you may be able to get the order modified. Orders are generally not reduced retroactively. If you don't get the order modified and fail to make child support payments, you are responsible for all unpaid support obligations plus interest. Contact your county child support office for more information.
If you owe unpaid income taxes, the IRS may seize your paycheck, bank account, house, or other property. If you can't pay the total amount due, contact the IRS to request a monthly repayment schedule.
You may be able to have payments on federal student loans deferred — no payments required — during periods of unemployment or financial hardship. But you can't qualify for a deferment once your student loan is in default. For more information on repaying student loans, visit Repay Your Loans or call Federal Student Aid at 1-800-433-3243 or download the publication Exit Counseling Guide for Federal Student Loan Borrowers. If you have private students loans, contact the loaning financial institution to learn your options.
Interest you pay on your student loan may be a tax deduction. For more information, visit the IRS webpage Tax Benefits for Education: Information Center.
Do you have outstanding balances on credit card accounts?
Making minimum monthly payments on your credit card and store charge cards will keep these accounts current. Avoid negative reports on your credit report. However, paying only the minimum — usually 2–3 percent of the outstanding balance — will increase your finance charges and extend the time it takes to pay off the balance. Compare interest rates between credit cards, banks and credit unions to make sure you are paying the lowest rate available to you.
Until your financial situation improves, destroying your credit cards and closing your accounts may be a good idea. At least put credit cards away in a safe place so you are not tempted to use them. If you are having difficulty paying credit card debt, you may find it helpful to get assistance from a non-profit Consumer Credit Counseling Service. Call the National Foundation for Consumer Credit (NFCC) at 1-800-388-2227 for the nearest consumer credit counseling program.
Is a consolidation loan a good idea?
Personal and mortgage finance companies want you to think so. Making a single payment may be easier and more manageable for you; however, it may take longer to pay the debt, and total finance charges may not be any less.
What about your credit record?
Late payment and nonpayment of bills is recorded on your credit record. That can damage your ability to get credit or increase the cost of credit. That's why contacting all of your creditors immediately if you cannot pay your bills is important. If you can pay something on each debt as agreed, it's less likely that your financial problems will be reported on your credit record.
Your Repayment Plan
Once you have determined how much money your family has for monthly living expenses and for paying off debts, decide how much you can pay to each creditor. Work out a repayment plan that shows how much you plan to pay on each bill. Put this plan in writing.
Now you are ready to contact your creditors to explain your situation. Tell each one how much you can pay and when you will pay them. For ideas about what to say when you contact your creditors by phone or by letter, see Talking with creditors.
Some businesses, such as utility companies, have special counselors for customers who can't pay their bills. These counselors can help you set up a budget plan to even out your payments during the year. They can also tell you if you qualify for government assistance programs that help with your energy or medical bills.
Making Your Plan Work
After you have worked out a repayment plan with your creditors, follow through with it. Make the payments you promised. If you fall behind on your new commitments, creditors will not be as understanding. If you fail to pay as promised, creditors may hire a collection agency or start legal action against you.
Pretending you have no money problems won't make the problems go away. Face the situation honestly. Openly discuss spending decisions with all family members. This will help everyone understand the changes and sacrifices needed for your plan to succeed.
Remember: No matter how bad your situation may be, you can't afford to ignore your bills and creditors. Prompt action is very important. Take charge. Let your creditors know you are having trouble before you miss payments and the situation becomes worse.
Worksheet — Debts Owed
|Creditor Balance||Amount Past Due||Amount Monthly Payment||Interest Rate||Is debt secured? If so, by what?||Total Owed|
Boelter, L. (2006). Managing Between Jobs: Deciding which bills to pay first. Madison, WI: Division of Cooperative Extension of the University of Wisconsin-Extension.
Adjusting to Suddenly Reduced Income (PDF) — Take into account the financial, emotional, and social aspects of sudden income loss.
Financial Capability — Online resources and workshops to make wise decisions about money and other financial resources.
Rural Minnesota Life — Provides information for Minnesotan rural families, including the other 16 Getting through tough times fact sheets.