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Debt troubles? Here’s which ones to pay first

If you are overwhelmed by debt, you might be tempted to simply avoid all your various debts, or just the big ones.

At the least, it is important to know which ones are essential to pay and which ones are not so essential (for the present, that is). How should you prioritize your debts?

Basically, if they will incur serious consequences, they are an essential debt. Let's get some perspective on the major ones.

Dafne Torres, director of operations with InCharge Debt Solutions, talks to counselors during a training session at a call center in Orlando, Florida, August 30, 2011. U.S. (Photo: REUTERS/Phelan M. Ebenhack)
Dafne Torres, director of operations with InCharge Debt Solutions, talks to counselors during a training session at a call center in Orlando, Florida, August 30, 2011. U.S. (Photo: REUTERS/Phelan M. Ebenhack)

Housing

Your rent or mortgage may be your most important expense. Put this at the top of your list. On the other hand, can you sell your home, get a good price for it, and live in a modest apartment?

It could save you the hassles of losing your home through foreclosure and destroying your credit.

Loans

  • Secured loans: Secured loans have collateral behind them. A common example is a car. Can you live without the item if it gets repossessed? If not, it is a priority. If so, you can probably miss some payments; but bear in mind that if you default, your credit report will note this.

  • Credit card bills: If your credit card is secured by an account with money in it, it is a priority and you should not miss payments; otherwise, you will lose the money in the account. If it is unsecured and you miss payments, you will incur late fees. If you default, your credit will take a big hit and you may even get sued.

  • Personal loans: Loans from family and friends are the least likely to affect you negatively if you miss payments or default. They also stand the best chance of being renegotiated.

  • Financial aid loans: There is the possibility of deferring payments on your student loans. There is also the possibility of default. However, you can also lose any tax refunds from the IRS and possibly suffer garnishment of your wages.

  • Back taxes: You can work out a repayment plan if you are in a big crunch. You can possibly defer paying on your bill or, in some circumstances, have your tax bill reduced.

Recurring expenses

  • Insurance: Not keeping current with your insurance could make it harder to get new insurance. For health insurance, it can jeopardize any care you are currently or plan to receive. With auto insurance, in some states you can actually lose your driver's license.

  • Child support: Child support payments should be at the top of your list. If you don't pay them, you could go to jail. The obligation to pay child support never expires and cannot be wiped out in bankruptcy.

  • Utility bills: Unless you can live like a hermit for a while, you will probably need water, power, and other services for your home.

  • Condominium fees: If you own a condo unit, failure to make your monthly association fees can result in a lien on your home. That typically kicks in after a certain number of months of nonpayment.

  • Business loans and credit: Failing to pay back loans related to your business could result in lawsuits and collection attempts.

Other bills and expenses

  • Professional services: Bills for various professional services, such as contractor work, could result in legal action if they are not paid, though you may have some breathing room with them.

  • Medical bills: You typically have a lot of breathing room for medical bills. But they can result in legal action if you do not pay them. You can contact the medical provider and work out a reduced payment plan.

  • Court judgments: Any judgment against you can result in garnishment of your wages or personal property.

Dive deeper: What to do when you're overwhelmed by debt

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

Read more information and tips in our Debt section

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