You've lost your job, or for some other reason don't have enough money to pay all of your bills. Which ones should you pay first, and which ones can slide for a while? Here's a basic rule of thumb written in "Guide to Surviving Debt," a book by the Boston-based National Consumer Law Center: "Always pay essential expenses and debts first. If any money is left, you can decide which nonessential debts, if any, to keep in your expense budget."
An essential debt represents a serious obligation that could produce severe or even life-threatening consequences if it's not paid. Do not make payments on nonessential debts when you haven't paid essential ones, even if your creditors are breathing down your neck.
Please do not misunderstand. I am not suggesting that you should just walk away from your financial obligations. You must pay your creditors; you must pay your bills. Not paying them is not an option. Of course it's not ideal to let some of your bills slide — but it is what it is. In time, your situation will improve and you'll be able to get caught up completely. But right now, you need to know how to get through this month.
Once you've determined which debts are essential, prioritize them according to the severity of the consequences you will suffer for non-payment. Here is a guide to follow, listed in order of priority.
FAMILY NECESSITIES. This means basic food and unavoidable medical expenses, such as health insurance. Even though they're essential, keep these costs to the absolute bare-bones minimum. Don't go out three times a week when you can't even pay the water bill.
RENT OR MORTGAGE. Always assume that your landlord or mortgage lender will immediately proceed to evict you or foreclose on your home if you are late with a payment.
UTILITIES. Next, you should pay the minimum required to keep the heat, power and water utility services. Your cable and Internet bills are not essential utilities. In fact, you should probably cancel them for now. Go to your local library to use the computers and borrow DVDs instead.
CAR PAYMENTS. If a car is necessary for your job, then making your loan or lease payment is the next priority.
CHILD SUPPORT. Paying child support is absolutely essential. Not paying can land you in jail. You have no option but to pay it.
OTHER SECURED LOANS. Beyond your home and car, any debts on furniture, boats, RVs or expensive electronic gear are likely to be secured (meaning the lender can repossess the item for nonpayment). Please note that you still have to keep current on all payments if you're in the process of selling these items.
UNPAID TAXES. If the IRS is about to take your paycheck, clear your bank account or seize your house or other property, you need to set up a repayment plan immediately.
Nonessential expenses and debts are financial obligations that will have a lesser and/or significantly delayed consequence if you withhold payment for a limited time. This is breathing room, not a pass; it's a short period of time while you figure out what to do.
STUDENT LOANS. Failure to pay could eventually lead to seizure of your tax refunds or wage garnishment. If you let this slide, expect to be charged penalty fees.
CREDIT CARDS, DEPARTMENT STORES AND GASOLINE CARDS. If you fall behind with these debts, you'll trash your credit score, lose credit privileges, pay horrendous late fees and — if the debt is unusually high — you may be sued. But you won't lose your home. You can recover.
PERSONAL LOANS FROM FRIENDS AND FAMILY. You should feel a moral obligation to pay, but these creditors will likely be the most understanding of your situation. Don't hide. Do the right thing and contact this person immediately to set up a face-to-face meeting.
MEDICAL, LEGAL AND ACCOUNTING BILLS. While these debts are real and will be paid eventually, they are rarely essential unless you are still receiving treatment.
OTHER SECURED LOANS. Every other debt you owe is probably in this category. These unsecured debts are rarely, if ever, essential enough to pay first.
I know this is such an emotional time for you. Don't allow your emotions to dictate how you distribute your money. And do not let your creditors set the agenda. Do not hide; do not lie. Above all, do not take your situation personally.
Adopt a business-like mindset and treat your creditors as you would want to be treated if the tables were turned. Be courteous and respectful, yet assertive. Do not make promises you cannot keep. And when your situation turns around (which it will!), keep the promises you have made to your creditors, your family and yourself.
Tough times never last, but tough people do.
Mary invites questions, comments and tips at [email protected], or c/o Everyday Cheapskate, 12340 Seal Beach Blvd., Suite B-416, Seal Beach, CA 90740. This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of www.DebtProofLiving.com, a personal finance member website and the author of "Debt-Proof Living," released in 2014. To find out more about Mary and read her past columns, please visit the Creators Syndicate Web page at www.creators.com.
Photo credit: Jeremy Segrott