Debts - Which To Pay Off First
Prioritizing Debt
It is quite likely that if you are experiencing debt problems then you are finding it increasingly difficult to keep up with your monthly debt repayments. Your income can only go so far and only some of your expenses can be reduced.
You therefore have little choice but to either delay, or not pay at all, some debt repayments as they come due. In this situation you will be forced to think very hard about which payments you really should pay first. You risk several things such as your home, gas, electricity, car and even your household possessions.
Following the rules in this chapter may make the difference between keeping or losing important property.
Do Not Take On More Debt To Pay Off Old Debt.
A short-term fix can lead to long-term problems.
Many people opt to take on new debt to pay off old debt instead of delaying or eliminating certain debt payments. Very rarely is this a good idea. The option to refinance or take on new loans and when, if ever, you should do so is discussed in a later article.
Your main strategy in dealing with too much debt is deciding which debts to pay first, which you can refuse to pay, and which you can put off until later.
The creditor who makes the most noise most often is not necessarily the creditor you should pay back the first. Many times these creditors make as much noise as possible to intimidate you since they have no other way to reclaim their money.
The creditors to be the most concerned about are those who quickly take action against your home, car, utility service or any other vital assets you may have.
Pay off creditors who can take the quickest action to hurt you, not those who yell the loudest and call the most often.
Your available resources should be used for the things most needed for your family - usually food, clothing, home and gas & electricity.
Since there is no ‘wonder list’ which gives the specific order in which debts should be paid, you should use this article as a general reference guide and make more decisions based on this information and your particular circumstances.
Debts with collateral are top priorities.
There is one particularly important concept you should keep in mind while you are deciding which debts to pay first and which you may need to let go. This is the concept of “collateral.”
Collateral is property that a creditor has the right to seize if you do not pay a particular debt. The most common forms of collateral are your home in the case of a mortgage (or deed of trust) and your car in the case of most car loans.
A creditor may also have collateral in your household goods, business property, bank account, or even wages. Collateral can take many forms. When a creditor has taken collateral for your loan, it has a “lien” on your property.
Determine which of your debts are ’secured’ and which are ‘unsecured’.
You should almost always pay secured debts first. Creditors who have collateral are usually referred to as “secured” creditors. They have the security of knowing that if you don’t pay, they can take the collateral from you and sell it to get their money.
Creditors without collateral are often referred to as “unsecured.” It is usually hard for unsecured creditors to collect what they are owed unless you pay voluntarily.
The notion that ’secured debts’ are the ones most vital to pay is a fairly simple one. The problem arises when you have a constant stream of debt collectors harassing you to pay unsecured debt, often distracting you from keeping the ’secured debt first’ rule in mind.
It is extremely important to remember this concept as you make decisions about your financial future.
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