How Important Is Your Debt?
How to figure out what you need to survive and how to improve your finances
Smart Money Management

Some debts are more important than others. An essential debt is one which you should put at or near the top of your list for payment. If you let an essential debt slide, you could face serious, even life-threatening consequences.

Essential Debts

Rent or Mortgage
Unless you know you are going to move and have a place to live, make paying your rent a top priority. House payments are a little different. If you've lost your job and it looks long-term, your first thought should probably be to sell the place, rent a moderately-priced place and use what's left over to pay your other essential bills. If you decide to stay put, payments on a home equity line of credit or second mortgage are also essential because you can lose your house if you don't pay.

Utility Bills
Being without gas, electricity, heating, water or a telephone is dangerous.

Child Support
Not paying can land you in jail unless you convince the judge that you really couldn't pay.

Car Payments
If you need your car to keep your job, make the payments. If you don't, consider selling it to avoid repossession.

Other Secured Loans
Secured debts are linked to specific items of property. If you don't repay the debt, most states let the creditor take the property without first suing you and getting a court judgment. If the property is something you cannot live without, however, you'll need to keep that debt current.

Unpaid Taxes
If the IRS is about to take your paycheck, bank account, house or other property, you'll want to negotiate to set up a repayment plan immediately.

Nonessential Debts
A nonessential debt is one with no immediate or devastating effects if you fail to pay. Paying these debts is a desirable goal, but not a top priority.

Credit and charge cards
If you don't pay your credit card bill, the worst that will happen before the creditor sues you is that you will lose your credit privileges.

Department store and gasoline charges
As with credit and charge cards, if you fail to pay these bills, you'll probably lose your credit privileges and, if the debt is large enough, you may be sued.

Loans from friends and relatives
You may feel a moral obligation to pay, but these creditors -- who probably seem the least like creditors of anyone -- should be the most understanding with you.

Newspaper and magazine subscriptions
These debts are never essential.

Legal and accounting bills
These debts are rarely essential.

Other unsecured loans
An unsecured loan is not tied to any item of property. The creditor cannot take your property. If you refuse to pay, the creditor can collect from you only by suing you and obtaining a court judgment. These unsecured debts are rarely, if ever, essential to pay first.

Essential or Nonessential?
Some debts straddle the line between essential and nonessential. Not paying won't cause severe consequences in your personal life, but it could prove painful nonetheless. In deciding whether or not to pay these debts, consider your relationship with the creditor and whether the creditor has initiated collection efforts.

Some of these debts include:

Auto Insurance
In some states, you can lose your driver's license if you drive without insurance. In California, you cannot even register your car without proof of insurance.

Medical Insurance or Bills
Especially if you are currently under a physician's care, you'll want to continue making payments. Also, if you have medical insurance through work and lose your job, you'll probably be able to keep your insurance coverage for 36 months, but you, not your former employer, will have to pay for it. If you let it lapse, you may have difficulty getting new insurance.

Car Payments for a Car that is Essential for Your Job
The inconvenience of not having a car may justify making these payments.

Items Your Children Need
Paying for a tutor for your child may not seem essential, but if the alternative is to have your child grow up unable to read, you probably want to keep paying for the help.

Court Judgments
Once a creditor has a judgment, the creditor can collect it by taking a portion of your wages or other property. If a particular judgment creditor is about to grab some of your pay, the fact that the original debt may have been nonessential is irrelevant.

Student Loans
Paying an old student loan isn't essential if the holder of your loan isn't hassling you. But paying the loan may become essential if the IRS is about to intercept your tax refund, the holder of your loan threatens to garnish up to 10% of your wages or you are making payments under a "reasonable and affordable" repayment plan to rehabilitate your loan and get out of default.

Do not, under any circumstances, make payments on nonessential debts when you have not paid essential ones, even if your nonessential creditors are breathing down your neck. This may sound obvious, but when pressured by bill collectors, many people forget the obvious. For example, if you pay a few dollars on an old hardware store bill just because its collector is the loudest or most persistent, you may face eviction or have your heat turned off because you won't have enough money left to pay for these crucial services.

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