As we’re coming out of the COVID malaise, more people are finding jobs. Yet as the economy takes off, many are facing the end of debt conciliation or housing assistance programs and suddenly may be faced with months of accumulated rent or credit card payments. Some debts have more severe consequences for non-payment than others. If you can’t pay all your bills, consider prioritizing.
Higher priority
When you can’t pay your bills, you need to think clearly about must-haves (needs) versus nice-to-haves (wants). Food, shelter, water, a way to get to work – those are all needs.
Housing. Whether renting or paying a mortgage, you can be kicked out of your apartment or your home for non-payment. However, since this cannot happen overnight many people consider this a lower priority when it comes to paying debt. Here’s the problem though – if you let a few months slide without paying for housing, you’ve dug a deeper hole that you’ll have to climb out of. And remember, housing is a major percentage of your monthly budget, so even though it frees up temporary cash flow it’s a bear to bring under control once you’re behind on your payments. Try your best to stay current on your housing bills.
Utilities. Everyone should agree that utilities are a necessity. But perhaps your definition of utility differs from others. When you are low on money, utilities shouldn’t include a super-fast internet connection or five subscription streaming services. Water, gas, and electricity, with perhaps an adequate internet plan (if you absolutely need it for your job) should be all you have. Pay utilities (or contact the utility to see if they offer help) and cancel superfluous subscriptions and upgrades.
A way to get to work. Notice I didn’t say a car. If you are in a situation where you can bike, walk, or take mass transit, it might be time to unload the car, especially if you bought more car than you could afford. Some consider the car expense a lower priority, but you must have a way to get to work (to earn money) or your debt issues could truly spiral out of control.
Groceries. Shopping should be curtailed except for true necessities – i.e., groceries – until the emergency passes. If you don’t know how to cook, visit the library for a couple of cookbooks or search online and try some recipes. Shop only with a list after you have made a weekly menu. If you’re single, find someone to cook with so you can share the costs, or look for ways to make the leftovers more exciting. Buy store brands, cheaper cuts of meat (or go vegetarian), and skip packaged goods and bottled water.
Insurance. Canceling insurance policies may seem like an easy way to free up some cash. However, if you don’t have car insurance and are pulled over, you could be arrested. Similarly, if you cancel your homeowners policy and have a mortgage, the lender can take action to purchase an insurance policy on their own and charge you (at whatever price they prefer). This doesn’t mean you have to make one bulk payment. Talk to your current company about monthly payments and call other companies to see if they have a cheaper rate.
Lower priority
Lower priority doesn’t mean there won’t be repercussions if you choose to ignore them. While a credit card company cannot take your house or car for non-payment, your credit score will surely suffer.
Credit cards. The minute you’re late on your credit card payment, you will start paying interest on all purchases along with your debt. Additionally if you skipped a payment instead of paying the minimum required, the credit card company can report your non-payment (after 30 days) to the credit bureaus. This may result in a credit score drop of 50-100 points, especially if you had pristine credit. However, that’s the worst they can do unless they take you to court for repayment.
Personal loans. Similar to credit cards, personal loans that have no collateral can tank your credit or you may be sued for collection. Within 30 to 60 days your lender may send you a letter of default.
Medical debt. With outstanding medical debt, the hospital or doctor’s office cannot report your non-payment to credit bureaus until 180 days have passed. Before that point they can hire a collection agency. Still, like other credit cards and personal loans, they can’t seize your house or your car.
Student loans. Student loans aren’t in default until you’ve missed nine months of payments. Your credit will take a hit though. Consider contacting your lender to see if they have a repayment plan where your payment is based on your income level.
Reach out to the lender
No matter if it’s a high priority or a low priority, make some calls to your lenders to see if they have assistance programs or will work with you to spread out payments or lower interest rates. For example, many utilities have a low-income program where they will put you in touch with a non-profit that can help with the bills. Credit card companies want to be paid, so if you’ve been a good customer you may have success reducing the interest rate.
When you’ve decided on which bills to wait on, also make a plan to get back on track. Cutting your spending to the bone and considering new sources of income can help you make sure this is a one-time only occurrence.
Photo by JoshuaS