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Sixteen Rules on Choosing Which Debts to Pay First

When long on bills and short on money you should direct your limited resources to what is most necessary for you or your family– typically food, clothing, shelter and utility service.  Unfortunately, there is no universally accepted magic list that provides the best order in which debts should be paid.  Everyone’s situation will be different.  The following list of sixteen rules about how to set priorities is from “Surviving Debt” (National Consumer Law Center, 3rd ed. 1999).

1. Always Pay Family Necessities First. Usually this means food and essential medical expenses.

2. Next Pay Your Housing-Related Bills. Keep up your mortgage or rent payments if at all possible. If you own your home, real estate taxes and insurance must also be paid unless they are included in the monthly mortgage payment. Similarly, any condo fees or mobile home lot payments should be considered a high priority. Failure to pay these debts can lead to loss of your home.

If you are having very serious unresolvable problems which require you to move to a cheaper residence, you might choose to stop paying the mortgage or rent. When you do so, you should not use that money to pay other debts, but rather save it as a fund to use for moving.

3. Pay What You Must to Keep Essential Utility Service. While this may not always require full payment (such as during a winter moratorium on disconnections), whatever payments are necessary should be made if at all possible. Working hard to keep your house or apartment makes little sense if it is not livable because you have no utilities…

4. Pay Car Loans or Leases Next If You Really Need Your Car. If you need your car to get to work or for other essential transportation, you will usually make your car loan or lease payments next after food, housing costs, medical expenses, utilities, and clothing. You may even want to pay for the car first if the car is essential to holding onto your job.

If you do keep the car, stay current on your insurance payments as well. Otherwise the creditor may buy for you at your expense even more costly collision and theft insurance that gives you much less protection. In most states it is also illegal not to have automobile liability coverage. If you can do without your car or one of your cars, you not only save on car payments, but also on gasoline, repairs, insurance, and the like.

5. You Must Pay Child Support Debts. These debts will not go away and can result in very serious remedies–including prison for nonpayment.

6. Income Tax Debts Are Also High Priority. You must pay any income taxes you owe that are not automatically deducted from your wages, and you certainly must file your federal income tax return even if you cannot afford to pay any balance due. The government has many rights which other creditors do not have, particularly if you do not file your tax return. Remember, though, if you have lost income due to a change of circumstances, your tax obligations will also be reduced. Pay only what is necessary

7. Loans Without Collateral Are Low Priority. Most credit card debts, attorney, doctor and hospital bills, and other debts to professionals, open accounts with merchants, and similar debts are low priority. You have not pledged any collateral for these loans, and there is rarely anything that these creditors can do to hurt you in the short term. Many won’t bother to try to collect in the long term.

8. Loans With Only Household Goods Collateral Are Also Low Priority. Sometimes a creditor requires you to put some of your household goods up as collateral on a loan. You should generally treat this loan the same as an unsecured debt that is as a low priority. Creditors rarely seize household goods because they have little market value, it is hard to seize them without court process, and it is time consuming and expensive to use a court process to seize them.

9. Do Not Move a Debt Up in Priority Because the Creditor Threatens Suit. Many threats to sue are not carried out. Even if the creditor does sue, it will take a while for the collector to be able to reach your property, and much of your property may be exempt from seizure. On the other hand, non-payment of rent, mortgage and car debts may result in immediate loss of your home or car.

10. Do Not Pay When You Have Good Legal Defenses to Repayment. Some examples of legal defenses are that goods purchased were defective, or that the creditor is asking for more money than it is entitled to. If you have a legal defense, you should obtain legal advice to determine whether your defense will succeed. In evaluating these options, remember that it is especially dangerous to withhold mortgage or rent payments without legal advice.

11. Court Judgments Against You Move Up in Priority, But Often Less Than You Think. After a collector obtains a court judgment, that debt often should move up in priority, because the creditor can enforce that judgment by asking the court to seize certain of your property, wages, and bank accounts. Nevertheless, how serious a threat this really is will depend on your state’s law, the value of your property, and your income. It may be that all your property and wages are protected under state law, and then you should still pay this debt only after more pressing obligations.

12. Student Loans Are Medium Priority Debts. They should generally be paid ahead of low priority debts, but after top priority debts. Most delinquent student loans are backed by the United States and federal law provides special collection remedies against you which other creditors do not, such as seizure of your tax refunds and denying you new student loans and grants.

13. Debt Collection Efforts Should Never Move Up a Debt’s Priority. Be polite to the collector, but make your own choices about which debts to pay based on what is best for your family. Debt collectors are unlikely to give you good advice. Debt collectors may be most aggressive to get you to pay debts which you should actually pay last. You can easily stop debt collection contacts and you have legal remedies to deal with collection harassment.

14. Threats to Ruin Your Credit Record Should Never Move Up a Debt’s Priority. In many cases, when a collector threatens to report your delinquency to a credit bureau, the creditor has already provided the credit bureau with the exact status of the account. And if the creditor has not done so, a collector hired by the creditor is very unlikely to do so. In fact, your mortgage lender, your car creditor, and other big creditors are much more likely to report your delinquency (without any threat) than is a debt collector that threatens you about your credit record.

15. Cosigned Debts Should Be Treated Like Your Other Debts. If you have put up your home or car as collateral on a loan, that is a high priority debt for you if the other co-signers are not keeping the debt current. If you have not put up such collateral, treat cosigned debts as a lower priority. If others have cosigned for you and you are unable to pay the debt, you should tell your cosigner about your financial problems so that he or she can decide what to do about that debt.

16. Refinancing Is Rarely the Answer. You should always be careful about refinancing. It can be very expensive and it can give creditors more opportunities to seize your important assets. A short term fix can lead to long term problems.

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Credit Tips That Will Help YouScore Lower Interest Rates

A good credit score translates into lower interest rates for home-shopping borrowers. In a mortgage lender’s eyes, the higher your score is, the less risk you are, and the more likely it is you will pay off your debt. For this reason, borrowers with lower scores usually end up paying higher interest rates on their loans. If this is you, don’t panic. There are a number of things you can do to adjust your credit score to receive a favorable review from the underwriter. Here are a few suggestions: Should I pay off all my past due balances and charge-offs? This is usually a good idea, but you only need to worry about the past due balances and charge-offs that have occurred in the last two years. Items more than two years old have little effect on your current credit score. In fact, if you pay off delinquent items over two years old, it can actually bring your credit score down - something you don’t want to do. Bringing that score up means you’ll get a better interest rate on your loan.

Should I close existing credit card accounts that I don’t use?

No. Part of your credit score is based upon credit history. If you have old credit cards that you don’t use very much, you still have the benefit of the credit history they represent.

Rather than trying to pay off all your credit cards, you can move part of the debt from one card to another to even out the distribution of debt. Try to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when trying to purchase a home. Also, if your credit provider will increase your line of credit, the ratio of debt to available credit is automatically reduced.

When married couples have separate credit card accounts, the debt can be transferred from one spouse to another to clear up credit issues for the other spouse. That spouse with clean credit can be designated as the sole borrower on the loan, but ownership of the home can still go in both names.

What about errors on my credit report?

If you have items that are showing up on your credit report that you know you have already paid, request that these items be removed by the credit bureau. They are obligated to rectify this within 30 days.

If there are items on your credit report that are less than two years old, send in your payment if possible and mark the back of the check with the following notation: “Accepting this check is evidence that the transaction is complete and this charge will be deleted from my credit record.” If necessary, the cancelled check will be proof that this should be promptly removed from your credit report if it interferes with the closing of your loan.

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Will filing bankruptcy wipe the slate clean and give me second chance?

Many bankruptcy attorneys apparently do not adequately understand or explain the effects of bankruptcy to their clients. Simply stated, bankruptcy is to your credit rating what the nuclear bomb is to world peace.

If you file for bankruptcy, every credit account that you decide to include in bankruptcy will become an “included in bankruptcy” account. Additionally, a bankruptcy filing and bankruptcy discharge listing will appear in the court records section of your credit report. Because so many negative items are attached to the bankruptcy, it becomes very difficult to remove all trace of the bad credit.

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Kenneth Harney is always writing great financial oriented articles.

Advice by Kenneth Harney : Beware of a credit-repair service that wants your money upfront

Advice by Kenneth Harney

WASHINGTON — Picture this: You’re eager to take advantage of today’s troubled real estate market and buy a foreclosed house at a fire-sale price.

The problem is you don’t have much money for a down payment. And your credit files are scuffed up with late payments.

What you need is a service that can help put it all together for you — linking you into lists of available foreclosures, credit repair, and even low-down-payment mortgage financing.

Companies that promise to do at least some of these things — especially to fix your credit — ply their wares aggressively on the Internet. But can they really do what they claim to?

Based on a recent settlement by the Federal Trade Commission, the only conclusion is: If the deal involves paying money upfront, don’t do it.

According to a complaint by the FTC filed in U.S. District Court in New York, the Home Buyers Consulting Network Inc. of Raleigh, N.C., promised would-be buyers that it could raise their credit scores by 50 to 100 points, help them locate foreclosed houses through a network of participating agents, and connect them with low-cost mortgage money to complete the deal.

Through online and telephone pitches, Home Buyers Consulting Network and its affiliated firms — GoodCredit .com, the Good Credit Company and 0DownHomeBuyers.com — allegedly guaranteed clients that they could “remove accurate, negative information from (their) credit reports permanently, including bankruptcies and past due bills,” according to the FTC’s complaint.

For their services, the companies typically requested an initial payment of $99 for credit repairs and $399 for credit and home-buying “consulting” services. The client also had to agree to a minimum contract period — anywhere from six to 12 months — and make weekly or monthly payments of $19 to $49. The companies promised to refund all monies except $99 if the customer was not satisfied.

After consumer complaints and an investigation in cooperation with North Carolina authorities, the FTC filed suit against Home Buyers Consulting Network and its chief executive, Douglas Andersen Moore, accusing them of violating federal credit and consumer protection statutes.

Among the claims:

? Home Buyers Consulting Network and its affiliates falsely promised clients that they could scrub credit records of even the most severely negative information, even though they were not able to do so when the information was “accurate and not obsolete.”

? The companies required payment in advance of actually performing their credit services — a violation of the federal Credit Repair Organizations Act.

In a settlement with the FTC in late May, neither Moore nor the Home Buyers Consulting Network admitted wrongdoing, but they agreed to stop “using any untrue or misleading statements” to pull in buyers looking for credit fixes, as well as to cease collecting money upfront for credit-repair services, and to provide the full disclosures to clients required by federal law.

The settlement imposed a $573,000 civil penalty and a $40,000 restitution of funds to customers. However, when Moore and his companies provided documentation that they were financially unable to pay the penalties, the FTC agreed to suspend all but $10,000 of restitution to customers. As part of the settlement, Moore agreed to intensive, ongoing monitoring of his business practices.

William Rothbard, the defendants’ attorney, noted that the agreement “does not prohibit” Moore from further involvement in credit, real estate or mortgage activities, and that “he is moving forward.”

What’s the significance of the settlement for buyers who need to boost their credit scores to qualify for a mortgage in today’s tougher underwriting environment? No. 1: If the problems in your credit files reflect actual late payments, non- payments, charge-offs, court judgments, tax liens or foreclosures, don’t look for magic or miracles. No legitimate “repair” service — no matter how much you pay — can make them disappear permanently.

Most serious credit issues are likely to remain in your files for three to seven years, and bankruptcies and foreclosures for as much as a decade. Tax liens sometimes remain on your records until they’re paid.

On the other hand, if your credit files contain erroneous information, it’s a different dynamic. Either you or an organization that specializes in credit assistance can contact the sources of the bad information and get it corrected on your national bureau files.

But under no circumstances should you pay money upfront for credit-repair services. If a company requires you to do so, file a complaint with the FTC at www.ftc.gov.

? Contact columnist Kenneth Harney at harney@earthlink.net.

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