If You’re in Debt, Here’s How to Figure Out What to Pay First

Financial Wellness By Noah - March 17, 2021

There’s no shortage of advice out there on the best ways to become debt-free. It’s easy to find experts who swear by their preferred method, from the debt snowball to the avalanche method to old-fashioned belt-tightening and budgeting. It’s harder to find personal finance experts who openly admit that sometimes, no matter how creatively families crunch numbers, there just isn’t enough money to meet the minimum payment on every bill.

If you have bills to pay and not enough funds on hand to cover them all, what happens next? How do you decide which bills are worth prioritizing, to minimize the impact of missed payments and protect your family's financial future as much as possible? What consequences should you expect if you can’t cover all your bills this month? Insight into different types of debt and ways to come up with extra funds can help you make the best debt repayment plan you can for your family.

The American Debt Burden

A report from the Pew Charitable Trusts in 2015 found that about 80% of Americans held some form of debt. Some people may only hold mortgage debt, which many financial experts consider “good” debt (because it’s a sign you’re building equity and that your overall creditworthiness was good enough to qualify for a mortgage). Another estimate suggests about 62% of Americans have credit card debt that can easily become a major financial worry.

If you can’t meet all of your minimum monthly payments, you need to plan how to prioritize your debt to avoid these serious consequences:

  • Collections: About 1 in 3 Americans overall, and 45% of residents living in predominantly non-white zip codes, have debt in collections on their credit reports. Debts in collections can damage your credit score, and collections agencies’ aggressive tactics can cause major stress and disruption to your household.
  • Foreclosure: If your mortgage is federally backed, there’s a moratorium on foreclosure in place until June 30, 2021. Still, a non-federally backed mortgage could be at risk, and you need to have a plan after June even if your home qualifies for the moratorium.
  • Credit trouble: The strength of your credit can affect whether you can finance a car or home. Unmanaged debt can severely damage your credit and your ability to meet future financial goals.

How to Prioritize Debt

Not all debt is created equal. Figure out which bills to pay first by assessing the potential for damaging consequences for your family’s finances.

Secured, unsecured, and priority debt

Secured debt is tied to an asset, so if you fail to make your payments, the creditor may be able to claim that property to satisfy the debt. Your auto loan or mortgage are examples of secured debts. Unsecured debt doesn’t come with collateral. Medical debt, student debt, and credit card debt are common types of unsecured debt. In general, you want to make sure you meet minimum payments on secured debt first, because you could put a critical asset like your home at risk if you fall behind, whereas a missed credit card payment doesn’t carry the same consequences.

Priority debt is not secured or tied to an asset, but it can still have a more severe impact than some lower-priority debts like an unsecured personal loan. Types of priority debt can include:

  • Child support paymentsMissed child support can result in a variety of consequences, including wage garnishment, withholding of a tax refund, and ultimately arrest and jail time.
  • Tax debt: Unpaid taxes are subject to penalties and interest. The IRS can garnish your income to claim the money owed or place a federal tax lien on your property.
  • Court judgments to creditors: Disregarding court orders can lead to fines, penalties, and legal hot water.
  • Fines or fees issued by a court or state agency (e.g., speeding ticket): Ignoring a speeding ticket or parking fine could ultimately cost you your drivers license, among other penalties.
  • Utility bills: A utility bill isn’t strictly speaking a secured debt, but providers do have the power to shut off your electricity or water services if you miss payments.

Note: “Priority debt” is a term with implications in bankruptcy, referring to debts that don’t discharge and must be paid in full, even after bankruptcy. For the purposes of this article, we’re using “priority” as a category for debts that come with more serious consequences than most unsecured debts. Some, though not all, of the priority debts listed here are considered priority debts in a bankruptcy sense as well.

What bills should I pay first?

Ideally, you’ll keep looking for ways to adjust your budget to hit minimums on all payments. If that’s not possible this month, tackle your debts accordingly. An order of high priority to low priority could look like this for some people:

  1. Court-ordered payments (e.g., child support, judgments), mortgage, essential utilities
  2. Tax debts, payday loans, car loans, medical debt
  3. Unsecured debt with the highest interest rates: private student loans, credit card debt
  4. Lower interest rate debts: federal student loans, personal loans, money borrowed from friends or family

What happens if I miss a mortgage payment?

Keeping a roof over your head is one of the most essential expenses to cover. But in pandemic times, it's hard to definitively answer the question of how many mortgage payments you can miss.  Normally, it’s typical for a lender to initiate foreclosure and eviction proceedings after just four missed payments. As part of pandemic relief, the federal government passed the CARES Act, which entitles most homeowners to mortgage forbearance if they need it. There’s a moratorium on foreclosure in place until June 30, 2021 if your mortgage is federally backed. 

Even if you feel confident that the bank can’t put your home into foreclosure, don’t just ghost on a payment. A late mortgage payment notice can do serious damage to your credit score, even in a pandemic. Not paying your mortgage during a grace period won’t affect credit because the lender won’t report you to the credit bureaus. But you may still face late fees. If you’re proactive about talking to your lender, you may be able to discuss waiving a late fee, tacking a skipped payment to the end of your mortgage term, or even requesting a late mortgage payment forgiveness letter to submit to credit agencies if you do end up having a skipped payment land on your credit report.

How should I spend my stimulus check?

The passing of the American Rescue Plan means many Americans will qualify for an additional stimulus check of $1,400 for adults and any dependents. So, a married couple filing jointly who have two dependent children and a combined income under $150,000 can expect $5,600.

One piece of bad news is median credit card debt alone for all age groups is above $1,400, and the highest median credit card debt by age is $3,200 (for people ages 45-54). Average household credit card debt is over $7,000. The stimulus alone probably won’t be enough to clear your debt.

Here are a few tips for smart stimulus spending:

  • Put some money aside to meet all your minimum payments for several months, rather than paying down a large chunk of debt now and coming up short on other bills next month.
  • If you can, set a portion aside for unexpected expenses, like a medical co-pay or deductible.
  • Keep taxes in mind: Unemployment benefits are subject to tax, which could affect whether you owe the IRS money this filing season.
  • Look for relief programs to help lower your bills, and consider other financing options that would provide you with extra cash to handle larger debts.

Options for Families Struggling With Debt Payoff

If you need cash flow relief but the stimulus check alone won’t cut it (or you don’t qualify for it), you can still take steps to get out of debt. Any or a combination of these strategies may help your family get on better financial footing.

Home equity access with Noah

If you're a homeowner, a Home Value Investment can provide a lump sum cash payment in exchange for a share in your home's equity, without adding another bill to your monthly load. Instead of paying monthly bills with interest, the amount homeowners pay Noah is tied to how much the home appreciates in value over the 10 year contract term. 

Home equity sharing with Noah isn’t a loan, which means it won’t show up on your credit report. Depending on how you manage your finances overall, accessing home equity with Noah may even provide the amount of money you need to completely pay down your high-interest debt and improve your credit. Homeowners who have partnered with Noah to access their home equity for debt payoff have decreased their credit utilization and seen their credit score rise by as much as 40 points.

Forbearance and payment plans

In some cases, lenders may be willing to work with you to press pause on payments or take other steps to make your payment easier. President Biden has extended the foreclosure moratorium for federally guaranteed mortgages through June 30, 2021. Homeowners also have until June 30, 2021 to request mortgage forbearance.

You can also reach out to credit card issuers or medical providers to discuss forbearance or negotiate a payment plan for credit or medical debt. Some creditors and medical providers may be willing to waive certain fees, temporarily reduce interest, or work out a payment plan with you.

Credit counseling

A reputable non-profit organization such as the National Foundation for Credit Counseling may be able to connect you with a qualified credit counselor who can help you eliminate certain fees, handle calls from collection agencies, or discuss debt consolidation options to make managing payments easier. They won’t offer you funding, but they can help you navigate challenges that arise when you’re behind on payments and build a stronger repayment plan.

Debt is a struggle, but it’s not inescapable. Use all the resources at your disposal to prioritize your monthly payments and find new possibilities to access funding and free your family from debt.