Prioritizing who to pay becomes really important if you have limited resources with which to pay bills, or if you find yourself in financial difficulty.
You'll want to make the most out of the payments that you are able to make. The idea is to try to put yourself and the things you own in as little jeopardy as possible.
Many financial experts have devised a priority list of which bills you should pay first. Mary Hunts philosophy says, "that your priority should be to pay whomever can harm you the most". What she means by this is, you should not skip paying your mortgage or your rent in order to pay an unsecured creditor such as the collection agent calling about a credit card bill.
Secured debt vs.. unsecured debt
In Canada, the bank holding your mortgage can foreclose on your house if you miss three mortgage payments in a row, while the collection agent calling about your credit card payment may choose to call you names and threaten you.
Do you understand what the differences are?
In the first instance, the bank can take away your house even though they haven't called you about your missing payments, because they didn't need to call you, they hold the security of your house. In the next instance, the collector tends to be harassing and rude because they have unsecured debt. There isn't anything else they can really do until they take it to the next stage of the collection process.
Sticks and stones...
When I was a young kid, we had a saying, "sticks and stones can break my bones, but names will never hurt me". Since the saying says, "supposedly names will never hurt you", you might be surprised to learn that a lot of people will pay that harassing collector who is calling them names, even when they can't afford to pay their mortgage or their rent.
Why do people pay the harassing, rude creditor when they haven't paid their rent?
Some people do not know any better. Initially, they believe that they aren't in trouble with their other creditors because they haven't heard from them. Usually secured creditors don't call right away because they are holding some form of security: a co-signor, the item purchased, or the house that was mortgaged. Because the collectors for unsecured debt are calling, individuals in financial trouble, often think they are in more trouble than they really are with that unsecured creditor. Most people don't understand the methodology of prioritizing who to pay and how it works.
The methodology of prioritizing who to pay works like this:
If you have limited resources, or are in financial difficulty even temporarily, think about paying debts and expenses in this order as the following expenses are: the basic necessities of life and you should consider taking care of them before any other expenses or debts are paid.
- first pay the rent or the mortgage because you need somewhere to live
- next are the taxes and house insurance. Property taxes need to be up to date so the city doesn't foreclose on your property. The house insurance is important and must be up to date because you need insurance to keep the mortgage in good standing. There is more wiggle room with taxes than there is with house insurance as property is usually not foreclosed upon unless there are more than one year of property taxes in arrears.
- it's pretty important to be warm and to be able to shower so utilities should be kept up to date or at least make enough of a payment that they don't get disconnected. If utilities are disconnected it's almost impossible to get them reconnected unless you pay the total balance owing along with a reconnect fee and a deposit.
- buying food is very important to sustaining life. Food is the only thing in life though, that you can get for free if you have a food bank in your community. Many people visit food banks to help sustain themselves when they have limited resources.
Secured creditors can take things away from you if you don't pay:
- car loans, boats, any type of loan that has collateral; which means the item can be taken away by the creditor if the payments are in arrears.
- if there is a cosigner for security the creditor can go after the cosigner for payment. If you cannot afford to make all of these types of payments you may have to consider selling some of the items to repay the debt.
- government debt such as arrears for income tax, overpayment of EI, etc. although this is unsecured debt the government is the only creditor who can garnish your wages without going to court. Also, governments will garnish your Income Tax Refunds, Child Tax Benefits, EI payments, etc. if you owe them money.
Unsecured creditors are usually the last priority...
- personal loans, lines of credit, overdraft
- credit card payments
- term loans
- children's recreation fees for hockey, piano, summer camp (unless used for daycare), etc,
- personal expenses
- most other types of credit and debt
What are your priorities for paying debt?
To master Prioritizing Debt contact A Step Beyond.ca
