2009 Virginia Polytechnic Institute and State University 2904-7030 Virginia Cooperative Extension programs and employment are open to all, regardless of race, color, national origin, sex, religion, age, disability, political beliefs, sexual orientation, or marital or family status. An equal opportunity/affirmative action employer. Issued in furtherance of Cooperative Extension work, Virginia Polytechnic Institute and State University, Virginia State University, and the U.S. Department of Agriculture cooperating. Mark A. McCann, Director, Virginia Cooperative Extension, Virginia Tech, Blacksburg; Alma C. Hobbs, Administrator, 1890 Extension Program, Virginia State, Petersburg.

FamiliesTakingCharge:DecidingWhichBillstoPayFirst

RevisedByCeliaRayHayhoe,Ph.D.,CFP®,FamilyResourceManagementSpecialistWhatdoyoudoifyourcurrentincomejustisn’tenoughtopaymonthlyexpensesanddebts?Puttingyourbillsinastackandpayingthemuntilthemoneyrunsoutwon’twork.Youhavealegalobligationtopayallofyourcreditors.Notpayingbillswillaffectyourcreditreportandcreditscore.Itcaneveninvolvecourtaction.Notpayingsomebillsmayhavegreaterconsequencesthannotpayingotherbills.Whenyourincomeisreduced,yourspendinghabitsmustchange.Thesooneryouchange,themorelikelyyourfinancialproblemscanbelessened.Takechargebysettingprioritiestomakesurethebasicneedsofyourfamilyaremet.Thinkingaheadcanminimizethelegalandeconomicriskswhenyoucan’tpayallyourbills.

WhoGetsPaidFirstFirst,youneedtoknowwhatyourdebtsandmonthlyexpensesare.UsetheSettingSpendingPrioritiesFactSheetinthisseriestodeterminethisinformation.ThenusetheBillPaymentWorksheetonthenextpagetosummarizewhatyouowe.Leavecolumnsblankthatdon’tapply.“BalanceDue”isforthingslikecarloanswhichyouarepayingoffoveraperiodoftime.Itistheamountlefttopayontheloan.AnnualPercentageRate(APR)istherateofinterestyoupayonloansandcreditcardaccounts.LookfortheAPRonmonthlybillingstatementsorinthepapersyousignedtogettheloan.ThehighertheAPR,themoreinterestyouarepayingonyourdebt.Don’tforgetpaymentsmadequarterly,semi‐annuallyorannually.Thisincludesthingslikeinsuranceandtaxes.UseyourMonthlySpendingPlanandOccasionalandSeasonalExpenseWorksheetfrom“SettingSpendingPriorities”tobesureyou’veincludedallpayments.Thetotalforthe“AmountDuePerMonth”ontheBillPaymentWorksheetwillnotbethesameastheexpensesontheMonthlySpendingPlanbecausethingslikefoodandgiftsarenotbills.Youmayfindthatyouneedtomakemoreadjustmentsonyourspendingplan.

2

BillPaymentWorksheetWhoYouOwe/Nameandaddresstosendpayment

AmountDuePerMonth

DateDue

AmountOverdue

BalanceDue

APR(InterestRate)

Whatwillhappenifyoudon’tpay

ExampleCreditCard000StreetAnytown,USA

$50 3rdofeachmonth

$100 $2,500 25.99% Notsecured,creditorcalls,maylowercreditscore,creditormaycloseaccount,turnoverforcollection,orfilealien.

Total

3

Decidewhichdebtswouldresultintheworstconsequencesforyourfamilyiftheyweren’tpaidorwerepaidlessthantheamountdue.Askyourselfthequestionsbelow.Whatwillaffectmyfamily’shealthandsecuritythemost?Usuallythehouse,utilities,food,transportationandmedicalinsurancetakepriority.Foodandgasmaynotbeonthisworksheetbuttheyareonyourspendingplan.Don’tforgettoleaveenoughmoneytocoverthem.Yourcarpaymentwillbeonyourbillworksheetbuttheamountforgasandcarmaintenancemaynotbe.Don’tbetemptedtoletmedicalinsuranceslidewhenmoneyistight.Ifanyoneinyourfamilybecomesill,uninsuredmedicalcostscouldbedevastating.Payhigh‐prioritybillsorcontactthecreditorsatoncetoworkoutsmallerpayments.(SeeVirginiaCooperativeExtensionpublicationon“HowtoPreventForeclosureonYourHome”ifyouarebehindonyourhousepayment.)Whatwillyouloseifthebillsaren’tpaid?Youcanloseyourpurchasesifthecreditorholdsthetitleofthepropertyassecurityfortheloan:ahomemortgageorcarloan,forexample.Sometimesfurnitureandlargeapplianceloansaresecuredloans.Ifyouaren’tsurewhichloansaresecured,checkthecreditcontract.Unsecureddebtsmayhavetotakelowerpriority,althoughyouareobligatedtopaythemtoo.Howmuchdoyoustilloweontheloan?Determinehowmuchyouhavepaidoneachloanandhowmuchyouowe.Ifyouhaveonlyoneortwopaymentslefttomakeonaloan,it’sprobablyagoodideatofinishpayingit,gettingthatdebtoutoftheway.Youmaybeabletoreturnneweritemsorsellthemtopayoffthedebt.Ifyouchoosetovoluntarilysurrendertheitem,you’llstillberequiredtopaythedifferencebetweenthemarketvalueoftheitemandtheamountremainingontheloan.Butgettingoutfromundersomeofyourdebtscanreducethepressureyoufeel.Whatinterestrateareyoupaying?Ifyouhavealoanwithalowerinterestrate,youmaydecidetopayoffahigher‐interestcreditcardbalancefirst,toreducetheamountoffinancechargesyouarepaying.Putcreditcardsawayinasafeplacesoyouarenottemptedtousethem.Closingtheaccountswillhurtyourcreditscoreandtheinformationaboutthecardwillstillstayonyourcreditreportevenifyouclosetheaccount.

Isaconsolidationloanagoodidea?Personalfinancecompanieswantyoutothinkso,butgenerallyaconsolidationloanchargesahigherinterestrate,often36percentormore.Ifyoucanqualifyforonefromabankorcreditunion,youwillpaylessinterest.Refinancingtosmallermonthlypaymentswillalsoextendthenumberofpaymentsyoumustmake,addingtothetotalcost.Whileasingleloanmaymakepaymenteasier,that’sasmallbenefitconsideringtheadditionalcosts

involved.Ifyoudogetaconsolidationloanusetheextramoneytopaytheloanofffaster.Watchoutforprepaymentpenalties.Aprepaymentpenaltywouldcauseyoutopaymoreifyoumakeextrapayments.Also,don’tbetemptedtogooutandmakemorepurchasesoncreditcardswithnobalance.

4

Whataboutyourcreditreport?Nonpaymentofbillsisrecordedonyourcreditreport.Yourcreditscorewillbelowerandthiscandamageyourabilitytogetcreditinthefuture.That’swhycontactingallofyourcreditorsimmediatelyifyoucannotpayyourbillsisimportant.Ifyoucanpaysomethingoneachdebt,it’slesslikelythatyourproblemswillbereportedonyourcreditreport.

YourRepaymentPlanOnceyouhavecalculatedhowmuchmoneyyouhaveformonthlylivingexpensesandforpayingoffyourdebts,

decidehowmuchyoucanpaytoeachcreditor,basedonprioritiesyoudeterminedwhileansweringthequestionsabove.Workoutarepaymentplanthatshowshowmuchyouplantopayeachcreditor.Putthisplaninwriting.

Nowyouarereadytocontacteachofyourcreditorstoexplainyoursituation.You’llneedtotellthemhowmuchyouareabletopayandwhenyouwillbeabletopayit.ThefactsheetTalkingwithCreditorsthatispartofthisseriescanhelp.Somebusinesses,suchasutilitycompanies,havespecialcounselorsforcustomerswhocan’tpaytheirbills.Thesecounselorscanhelpyousetupabudgetplantoevenoutyourpayments

duringtheyear.Theycanalsotellyouifyouqualifyforfuelassistanceoranyavailableprograms.

LooktotheFutureRemember—nomatterhowbadyoursituationmaybe,don’tignoreyourbillsandcreditors.Promptactionisveryimportant;letyourcreditorsknowyouarehavingtroubleBEFOREyoumisspaymentsandthesituationbecomesworse.Onceyouhaveaplanforpayingbills,sticktoit.Contactanycreditorsyoucannotpay.Offertopayonlytheinterest,arrangeforalongerperiodoffinancingormakeminimumpayments.Avoidtakingonanynewdebtforfamilylivingexpenses.Whenyouhavereduceddebtstoamanageablelevel,startaregularsavingsaccount.Buildanemergencyfundtohelppayunexpectedexpenses.ReferencesBoelter,Linda.“DecidingWhichBillstoPayFirst.”CooperativeExtension,UniversityofWisconsin‐Extension.1990.Bills.”HomeEconomicsCooperativeExtensionService,OklahomaStateUniversity.1989.OriginalPreparedby:IreneLeech,AssociateProfessor,DepartmentofApparel,Housing,andResourceManagement,VirginiaTech.Reviewedby:CristinSprenger,ExtensionAgent,FamilyandConsumerSciences,FamilyFinancialManagementPublicationsChairKimberlyCardwell,ExtensionAgent,FamilyandConsumerSciencesL.DawnBarnes,SeniorExtensionAgent,FamilyandConsumerSciencesFamilies Taking Charge is a multi‐part series for individuals and families experiencing financial stress as a result ofdifficulteconomictimes.ContactyourlocalExtensionOfficeforcopiesofotherpublicationsinthisseries.