Identify the Expenses that are Critical to Keeping Your Life Running Smoothly
When there isn't enough money to go around, it's time to get back to basics: You need a roof over your head, food, utilities and medical care. It's very easy to let the urgency of a creditor on the other end of the telephone line dictate your priorities, and that often means that the wrong bills get paid first--because while your credit card company will start calling almost as soon as your payment is past due, you probably won't hear from the electric company until your service is about to be disconnected--and at that point, you may owe a big balance that you can't pay all at once. Keep necessities at the forefront.
Identify the Expenses that Will Carry Serious Consequences if They're Not Paid on Time
Some of these expenses have already been covered in the "basics". For instance, eviction or mortgage foreclosure would be a serious consequence you'd definitely want to avoid, but keeping a roof over your head is already on the top priority list. Some other high-consequence defaults to consider: -Defaulting on your car loan may mean repossession, and that may leave you without critical transportation to work or seek employment -Failure to keep up your car insurance premiums means that you'll lose coverage, and that could lead to suspension of your driver's license, a costly reinstatement process, and possibly even arrest -Unpaid property taxes, just like mortgage delinquencies, can result in foreclosure You may have other high-consequence debts. The important thing is that when assessing and prioritizing your debts, you think clearly about what could happen if that debt is not paid or is not paid on time.
Calculate Whether You Can Cover Your Basic Expenses and High-Consequence Debts
Before you even give a thought to those low-consequence debts like credit card debt, stop and assess whether or not you can cover the essentials: the necessary expenses of day-to-day living and the high-consequence debts you already have. If you can, set aside the money necessary to cover those expenses and debts and take a look at what's left. The leftover is what you have to offer as you prioritize and attempt to work out payment with your other, low-consequence creditors. If you don't have enough money to cover the basics and the high-consequence debts, and you can't come up with additional funds in the short-term, you will have to try to reduce your basic expenses or negotiate with your high-consequence creditors.
Reduce Basic Expenses
If you've determined that you have enough money to cover your basic expenses and high consequence debts, you can skip this step...but you probably shouldn't. Most of us can find places to reduce our living expenses, and if money is tight it's a step all the more worth considering. Most people making this kind of analysis don't have a lot of extras to cut out--you're probably not eating out or buying a lot of new clothes, for instance--but there may still be places you can cut back. For instance, take a look at your grocery list--and if you don't have a grocery list, make one. Know what you need and don't browse around, adding things on impulse. Consider whether or not you really need both a home telephone and a cell phone. While these reductions may not be large, you may be surprised to discover that they add up to fill the gap between your income and your basic expenses and high-consequence debts.
Negotiate to Reduce or Defer Payments on Your High Consequence Debts
Some high-consequence debts are practically set in stone. For instance, it's very unlikely that your automobile insurance carrier is going to continue to cover you without payment, even in the short term. But others, particularly those that are secured, may be very willing to work with you. Many automobile finance companies, for instance, will allow you to skip a payment or make a smaller, interest-only payment. It's always easier to negotiate with these creditors, though, before you get behind--that's another reason that prioritizing them is so critical. Before you start to negotiate, make sure that you have a solid handle on exactly what you need--know how much money you have to spend and what kind of gap you have to fill. Then work with one creditor at a time until you've closed that gap.
If There's Money Left to Go Around, Negotiate with Your Low-Consequence Creditors
Low-consequence doesn't mean NO consequence, and you don't want to ignore these debts--just to put them in their rightful place BEHIND your living expenses and high-consequence debts. These creditors can take action against you, such as turning you over to a collection agency and/or filing a civil lawsuit. In the long-term, you're obviously going to have to close the gap between your income and expenses by increasing income or decreasing expenses (or both). In the short-term, see what you can do with the money you have left after covering your basic expenses and high consequence debts. Begin negotiations with your low-consequence creditors--but know going in to those negotiations how much money you have available to work with these creditors. Do not let them pressure you into re-routing money reserved for basic living expenses or high-consequence debts.
Consider Other Options for the Long-Term
If the basics are under control but those low-consequence debts just keep growing, it may be time to explore other options. If your credit allows, for instance, you may want to look into taking out a lower-rate loan in order to pay off the high-interest, low-consequence debts and consolidate them into one lower monthly payment. Many low-consequence debts are also dischargeable in bankruptcy, so if you're still watching balances grow, that may be an option you wish to explore. Whatever your decision, remember that your financial priorities are determined by hard realities, NOT by the sense of urgency of the person on the other end of the telephone line.