Debt Priority - Emergency Hierarchy of Debt

By: Michael Killian

What do you do when all of a sudden the month is just beginning and the $$$$'s are
gone? You put the emotion away and get crackin' with bill priorities and some cold hard facts about your bills... and maybe even the priorities in your life. Believe it or not, some bills are definitely more important than others. Don't forget, this is an emergency.

Rent/mortgage - You aren't getting very far without a roof over your head. If you're looking at long-term financial distress you may have to consider selling or relocating, but clearly, housing is an essential.

Utilities - Housing also means utilities. Especially if there are youngsters, don't even think of eliminating gas or electric. Reduce usage as much as you can but insure you pay gas, electric, and water. The phone is a different story along with cable. The former is optional in moderation and the latter is "Get rid of it NOW!" until better times.

Child support - Unless jail is an option, child support is not. Plan to pay it.

Car Payment - If you need the car for a job, it is an essential. If there is an alternate transportation, the car and insurance may have to be a non-survivor.

Secured Debts - Secured debts are those assigned to a collateral (house, car, furniture, etc.). Creditors can often live with a late or missing payment or even two. Contact the creditor and explain the circumstance, but definitely do not just ignore your creditor. Yes, your credit may be hurt, but we are dealing with an emergency and wounds will occur. If the disaster is long term you may have to consider surrendering the property.

Unpaid Taxes - Negotiate payments but don't ignore this one. Consider it child support to your government.

Food - Just because food is a priority, it doesn't mean filet mignon. Common sense rules in this area.

Unsecured Debt - Unsecured debt are those loans without property attached: credit cards, department store loans, gas cards, medical bills, loans from friends. (Note: Student loans should be considered as a required debt.) Failing to pay these will eventually be very painful with your credit and good name but are probably the least devastating for the short term.

In Between Items - Medical insurance, children's "needs", and other debts unique to your circumstance will require a value judgment. How long is the emergency.. what can you live without... how bad is the situation... can the debts be delayed?
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The Process

1. List all your bills and their expected amounts. Sequence them according to their priority to be paid 1, 2, 3, etc. beginning with your mortgage as #1. At one of the priority numbers you will determine where "Must Pay" ends and "Should Pay" probably starts. Draw a horizontal line here and continue down the list. You might now reach a point of ending "Should Pay" items and find you are in an area of "Would Like To Pay". Draw another horizontal line.

2. Start paying priorities 1, 2, 3, ... until you're out of money or finished with "Must Pay". Determine your deficit to "Must pay" items. If you still have money, continue with "Should Pay". If you run out of money, place their amounts on your deficit list. If there is still money left, go onto "Would Like To Pay" until you run out. If there is no money or you run out, ignore the remaining list since they can be taken care of in better times.

3. Using your deficit list, contact your creditors. Many will be willing to work with you to skip a payment, lower interest, pay interest only for a month or two, or offer a number of other options. Maybe they won't, but it won't hurt to ask. (Used judiciously, "accidentally" mentioning the possibility of bankruptcy, sometimes yields major power.) Adjust your deficit list accordingly.

4. Optionally talk to a debt counselor but not a debt consolidator. At the very least, try to share your list with someone you trust. Often times another set of eyes can see something more objectively or have ideas you never considered.

5. Determine how to make up the difference on your deficit list with some of the following ideas:

Reduce expenses by applying many of the frugal concepts at this and other sites. Take on a second job for the short term.

Have a garage sale. Sell an asset. Rent something out.

Consider funds from savings, 401(k), insurance, and even friends. (Note: DO NOT cash in a 401(k).)

If you rent, see if labor might substitute for part or all of the amount.

Consider a reverse mortgage, equity loan on your home or car, or signature loan from a credit union. Please do not consider this unless bankruptcy is the only other option since in the long run an additional loan will just make matters worse.

As an absolutely final resort, consider bankruptcy but not before seeking formal financial counseling.

Research other means of reducing your budget.

Readers will probably be interested to know Mike, the author of this article, also offers a free debt elimination mini-course via e-mail. You can enroll at .

Debt, Loans & Business Cashflow
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