Deciding What Bills to Pay First

When you don't have enough money to cover your family's basic living expenses and pay all your creditors, you face some difficult financial decisions.

When family income is reduced, your spending habits must change. The sooner you change, the more likely your financial problems can be lessened. Your family should be part of the decision-making process, since their cooperation is essential to carry out the plans.

Sizing Up Your Situation

When your bills exceed the money to pay them, contact the people to whom you owe money - your creditors - and explain your situation. Creditors will usually work with you to adjust your payments because they want their money.

Before you can talk to your creditors, you need to take a hard look at your situation and make some decisions about how much and when you can pay. First, answer the following questions:

• How much income can you count on each month?

• How much money is needed to cover your family's essential monthly living expenses? A worksheet, "Debts Owed," is provided to help you get a clearer picture of what and how much you owe.

• How long is your present financial situation likely to last?

• What assets (savings, items that could be sold or returned) do you have that could be used to pay off your debt?

• What debts are the most important to repay first?

• What debts could be satisfied by voluntarily returning the item financed?

Other sections of this manual, "Setting Spending Priorities," " Strategies for Spending Less," and "Making the Most of What You Have," can help you answer these questions. They are available from your local Texas Agricultural Extension Service Agents.

Who Gets Paid First?

You are legally obligated to pay all of your creditors. If you can't pay all your bills, you must decide how much to pay to each creditor. One way is to divide available money and pay every creditor a share of what you owe. For example, if half of your debt is with one creditor, they would be paid half of the money you have for paying loans. This is probably the fairest way, but it doesn't always work because each creditor must agree to reduce the amount they receive and extend the payment period.

The second method is to determine which creditors receive the most money. Think about the worst consequences for your family if certain debts weren't paid or if less were paid than the amount due.

Answering the questions below will help you decide:

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. See another section of this manual, Meeting Your Insurance Needs, for additional information. 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 lose your purchases if the creditor holds the title of the property as security for the loan, such as an appliance or car loan. 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. By getting that debt out of the way you free the amount you had been paying on it to cover other, high-interest or secured debts. 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. Getting out from under some of your debts can reduce the pressure you feel.

What interest rate are you paying? Credit card firms charging 1.5 % interest per month would receive 18% interest per year on the unpaid balances. If you have a loan with a lower interest rate, you may decide to pay off the 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% or more. 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 contract record? Nonpayment of debts 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 financial problems will be reported on your credit record.

Worksheet - Debts Owed * This column can be used for minimum amount due for credit card debts.

**May not apply to credit card debts

Total Owed _________ Total Payments _________

Your Repayment Plan

Once you have calculated how much money your family has for monthly living expenses and for paying off debts, decide how much you can pay to each creditor, based on priorities you determined while answering the previous questions. 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 family situation. You'll need to tell them how much you are able to pay and when you will be able to pay it. More information about what to say when you contact your creditors in person, by phone or by letter is included in the manual section, Talking with Creditors. 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 other available programs.

Another source of assistance with credit and money management problems is the Consumer Credit Counseling Service. To find the office nearest to you call (800)-373-2227.

Making It Work

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 worked out a repayment plan, follow through with it and make the payments you promised to make. If you fall behind on your new commitments, creditors will be less understanding. If you fail to make the payments, creditors may hire a collection agency to make you pay.

Pretending you have no money problems won't make the problems go away. You and your family must face the situation honestly. Openly discuss spending decisions with all family members. This will help everyone realize that changes and sacrifices must be made for your family's plan to be successful.

References

Boelter, Linda. Managing Between Jobs - Deciding Which Bills to Pay First. University of Wisconsin - Extension and Oneida County UW 1994.

Dealing With Creditors When Income Is Reduced. Cornell University. Cooperative Extension Service. 1983.

Maddox, Esther. How to Get Out of Debt. University of Georgia. Cooperative Extension Service. 1985.

Thomas, Natali. Coping With Creditors. University of Alaska. Cooperative Extension Service. 1986.

Information in the section of the manual was reproduced from Getting Through Tough Times - Deciding White Bills to Pay First by Charlotte Crawford and Lois E. Smith, University of Illinois Cooperative Extension Service. 1994.

Contact your local Texas Agricultural Extension Agents' office for copies of other sections of this manual. The address and phone number can be found in the yellow pages of your phone book under "governmental offices - county."