Families Taking Charge: Deciding Which Bills to Pay First

Author: Irene Leech, Extension Specialist, Consumer Education, Virginia Tech

Publication Number 354-101, June 1996

Introduction

What do you do if your current income just isn't enough to pay monthly expenses and debts? Putting your bills in a stack and paying them until the money runs out won't work. You have a legal obligation to pay all of your creditors. Not paying bills will affect your credit record and possibly involve court action. Not paying some bills may have greater consequences than not paying other bills.

When your income is reduced, your spending habits must change. The sooner you change, the more likely your financial problems can be lessened.

Take charge by setting priorities to make sure the basic needs of your family are met. Thinking ahead can minimize the legal and economic risks when you can't pay all your bills.

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Who Gets Paid First

First, you need to know what your debts and monthly expenses are. Use publication 354-100 in this series, "Spending Priorities," to determine this information. Then, use the Bill Payment Worksheet which is part of this publication to summarize what you owe.

Leave columns blank that don't apply. Balance owed is for things like car loans which you are paying off over a period of time. It is the amount left to pay on the loan. Annual Percentage Rate (APR) is the rate of interest you pay on loans and credit card accounts. Look for the APR on monthly billing statements or in the papers you signed to get the loan. The higher the APR, the more interest you are paying on your debt.

Don't forget payments made quarterly, semi-annually or annually. You can record them in one of two ways. One method is to record amounts and dates payments are due in the appropriate monthly payment column. Another way is to assign some money each month to pay these irregular expenses. Figure how much you pay in total each year and divide it into 12 equal amounts. This amount can be put aside each month for this type of expense.

Decide which debts would result in the worst consequences for your family if they weren't paid or were paid less than the amount due. Ask yourself the questions below.

What will affect my family's health and security the most? Usually the house, utilities, food, transportation and medical insurance take priority. Don't be tempted to let medical insurance slide when money is tight. If anyone in your family becomes ill, uninsured medical costs could be devastating. Pay high-priority bills or contact the creditors at once to work out smaller payments.
What will you lose if the bills aren't paid? You can lose your purchases if the creditor holds the title of the property as security for the loan: a home mortgage or car loan, for example. Sometimes furniture and large appliance loans are secured loans. If you aren't sure which loans are secured, check the credit contract. Unsecured debts may have to take lower priority, although you are obligated to pay them too.
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 voluntarily surrender 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. But getting you out from under some of your debts can reduce the pressure you feel.
What interest rate are you paying? If you have a loan with a lower interest rate, you may decide to pay off a higher-interest credit card balance first, to reduce the amount of finance charges you are paying. 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.
Is a consolidation loan a good idea? Personal finance companies want you to think so, but generally a consolidation loan charges a higher interest rate, often 20 percent or more. And, refinancing to smaller monthly payments will extend the number of payments you must make, adding to the total cost. While a single loan may make payment easier, that's a small benefit considering the additional costs involved.
What about your credit record? Nonpayment of bills is recorded on your credit record and can damage your ability to get credit in the future. 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, it's less likely that your problems will be reported on your credit record.

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Your Repayment Plan

Once you have calculated how much money you have for monthly living expenses and for paying off your debts, decide how much you can pay to each creditor, based on priorities you determined while answering the questions above. Work out a repayment plan that shows how much you plan to pay each creditor. Put this plan in writing.

Now you are ready to contact each of your creditors to explain your situation. You'll need to tell them how much you are able to pay and when you will be able to pay it. Publication 354-102 in this series, Talking with Creditors, can help. 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 fuel assistance or any available programs.

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Look to the Future

Remember--no matter how bad your situation may be, don't ignore your bills and creditors. Prompt action is very important; let your creditors know you are having trouble BEFORE you miss payments and the situation becomes worse.

Once you have a plan for paying bills, stick to it. Contact any creditors you cannot pay. Offer to pay only the interest, arrange for a longer period of financing or make minimum payments. Avoid taking on any new debt for family living expenses. When you have reduced debts to a manageable level, start a regular savings account. Build an emergency fund to help pay unexpected expenses.

References

Boelter, Linda. "Deciding Which Bills to Pay First." Cooperative Extension, University of Wisconsin-Extension. 1990.

Fox, Karen and Dorothy Goss. "Paying the Bills." Home Economics Cooperative Extension Service, Oklahoma State University. 1989.

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Families Taking Charge is a multi-part series for individuals and families experiencing financial stress as a result of difficult economic times.