What should you pay first when you’re overwhelmed by debt?

It can be difficult to decide what is the most important debt to pay off first when your dealing with such a vast array of choices; credit cards, mortgage, school loans, secured and unsecured debt. Prioritizing which one to pay first will help you to avoid making the situation worse. This is even more important the tighter the funds become. Here we have provided you with a guide to help you understand how to establish the most important debts to pay off and why they should be first. Number One Priority - Home Mortgage or rent should always be at the top your list of bills to pay each month. You don’t want to fight a bank foreclosure or possibly the auction of your home. It’s also not good to be served an eviction notice. Unlike falling behind on some of the other types of debt, finding yourself with nowhere to live will affect every aspect of your life. Mortgage and other large debts can be the hardest to recuperate from in regards to your credit score. The avalanche from this type of default continues even further. A damaged credit rating will make it more difficult to find a new place to live and almost impossible to purchase a new home. Home payments sometimes have taxes and insurance included, but not always. These two should be a top priority as well. 1. Property Taxes – It is always a good idea to have the taxes rolled into the mortgage payment in the form of an escrow account. If his is done, making the mortgage payment on time guarantees the taxes will also be paid on time. If you have no choice, but to have separate bills, make monthly bill instead of one large payment at tax time. It’s easier to come up with smaller amounts over a large lump some. If you end up with unpaid taxes, a lien will be placed on the house, preventing you from selling the house until the taxes are up to date. 2. Property Insurance – Any time a person has a mortgage on a home, property insurance is required. While this may not necessarily be a debt, it is an important protection to have for your investment. The bank views it the same way. They too, want to protect their investment in you “the home”. Collateral Debts Collateral that a lender can repossess is one way a loan may be approved. These types of debts should be the next priority after your housing bill is paid. Failure to pay this debt may result in the loss of your car or other possessions you put up as collateral against the loan. The object (e.g. car) that gets taken will be sold off. Even after the sale of the object, you will still be on the hook for the remainder of the loan. Lose your car… lose your job? Avoid this by making the payments on these debts a priority. Income Taxes Prevent the IRS from placing liens on your assets by paying your taxes. If your not careful the car you own, your house, property, and the assets of your bank account could become the Federal Governments. Fall too far behind and they may even garnish your paychecks (take money from your check before you even see it). Yes, they have the legal right to do this. This alone should be enough to convince you that tax debt should be high on your priority list of debts to pay. You should pay equal attention to paying both your state and government taxes. Either one or both could take action against you for not paying. Federal Subsidized Loans Even bankruptcy will not relieve you of any federal subsidized loans you may have taken out. You will always be responsible to make good on the reimbursement of this type of loan. If you choose to ignore this debt, the IRS has the legal authority to apply any tax refund you were expecting and apply it to a student loan debt. As with income tax debt, the IRS may choose to garnish your paycheck to make payments towards federally subsidized loans. Last, but not least, you will lose your ability to receive any other federal housing or student loans in the future. Medical Bills All unpaid medical bills have the potential of ruining your credit score. These types of bills may eventually cause liens to be placed on assets and/or your paycheck to be garnished. The hospital or medical facility will send unpaid accounts to collection agencies, followed by filing a lawsuit in an attempt to collect a debt. Credit Card Debt While credit card debt may be the least of your worries, you should always make every attempt to pay the minimum. Failure to make the minimum payment will simply cause the size of your debt to grow quicker. Lack of minimum payment may cause the credit card company add on late fees and even raise your interest rate. The company will do everything they can to collect on the debt, including sending your account to a debt collection agency. Eventually they may get a judge to authorize wage garnishment and/or collecting some of your assets to pay some or all the debt. You can only ignore a debt for so long. Eventually the process will catch up to you and cost you dearly. It’s just not worth risking your home, car and potentially your job. Always take care of the top priorities first and keep communication going with the lenders of any debts you may be struggling with. Make sure to make every attempt to pay something on each of your debts. Most lenders don’t want to take extreme action against you, but they will if you leave them with no other choice.