Which Creditor Should I Pay First When Money Is Tight?

 

When finances are tight, you may find yourself in the unfortunate position of needing to decide which bill to pay first in a given month.

Car payment or credit card? Mortgage or doctor’s bill? Rent or utility bill? Should you account for a regular monthly household expense before paying any creditor? That is, should you put food on the table before responding to that collection notice?

When your budget is thin and the phone is ringing incessantly, it is often difficult to think clearly through the noise. Every creditor is first in line—according to that creditor.

However, when push comes to shove, there is a clear priority of importance to these demands upon your paycheck.

This priority ordering is premised, of course, on your family’s human needs, first and foremost.

 

1. Housing Expenses: Back Rent or Mortgage Payments

 

Before even thinking about paying a credit card or medical bill, you need to first ensure that you are maintaining the roof over your head.

Whether you are a homeowner or renter, your first priority is staying out of the cold. And keeping your family out of the cold, especially if you are a parent with small children.

 

• Rent Payments

 

If you are a renter, in particular, you should be aware that, in Michigan, landlords have a very efficient legal process for evicting you from your home if you are even 1 day late on your monthly rent payment.

If you have a “grace period” of any sort, it is only because your particular landlord has written it into your particular lease. It is not something that is otherwise guaranteed to you by Michigan law.

When you become delinquent in your rent payments, your landlord will have the right to issue to you a 7-Day Notice to Quit.

If you aren’t able to pay your rent within 7 days of service of that Notice (dodging or avoiding it won’t help you), your landlord will bring a summary proceeding for eviction in your local Michigan district court. That is, you’ll be sued for eviction.

If you don’t pay the rent or respond to the complaint filed by your landlord at that point, the court will issue a default judgment of possession, entitling your landlord to have a court officer remove you from your property once 10 days have expired.

In other words, the process allows for some time for you to come up with the rent—but not very much.

 

• Mortgage Payments

 

If you are a homeowner and miss a mortgage payment, you may or may not hear anything at all from your mortgage servicer. They call or email a few reminders of your need to pay—but it’s not necessary, legally speaking.

In nearly all cases (given that most mortgage contracts are drafted from a standard “Fannie Mae/Freddie Mac Uniform Mortgage Instrument” document), your mortgage servicer or holder is entitled to begin foreclosure proceedings under Michigan State law and under once you miss a single mortgage payment.

Most mortgage contracts will include a 7-day grace period—but you’d better check yours to ensure that the standard clause from the Fannie Mae/Freddie Mac form hasn’t been crossed out. It’s always a possibility.

Generally, however, your mortgage file will be assigned to your servicer’s foreclosure attorney (likely Trott Law or Orlans or Potestivo or a few other usual suspects in Michigan) for the initiation of a foreclosure proceeding on or after you’ve missed 3 consecutive mortgage payments.

Once this occurs, the foreclosure attorney will begin mailing you notices as required under Michigan and Federal law informing you of your arrearage and the timeframe in which you have to cure it. Eventually, you’ll receive a notice copy of a scheduled sheriff’s sale of your property. That is, notice of the foreclosure auction.

You do, therefore, have slightly more time to make your  mortgage payments under this timeframe than you would if you were a renter—but it remains limited.

If you have income coming in but cannot quite come to an arrangement with your servicer or cure the arrears, you need to speak with an attorney about your options—and, in particular, the option of filing a Chapter 13 bankruptcy.

A Chapter 13 bankruptcy will stop the sheriff’s sale and allow you up to 5 years to cure your mortgage arrearage.

However, it’s simply better not to let this bill slip into arrearage in the first place. If money is tight, short one of the creditors at the bottom of this list—and then consult an experienced Detroit bankruptcy lawyer.

 

2. Food/Grocery Expense

 

You need to eat to live. Your children need to maintain a healthy diet in order to grow and develop properly.

It is simply not an option to let a month pass without buying groceries just so you can pay, say, a Citibank credit card bill. You don’t need us to tell you that.

However, can you shop at Aldi rather than Whole Foods? Cook at home rather than eating out? Consider whether some belt-tightening is possible without sacrificing your family’s nutritional needs.

If you end up filing for bankruptcy, especially a Chapter 13, this sort of budgeting will be expected of you by the US Bankruptcy Court.

 

3. Utility Expenses

 

Likewise, in a state like Michigan, with widely varying weather and temperature patterns throughout the year, it is not really optional to skip an electric or gas bill to pay credit card bills instead.

If you’re a homeowner, you can do incredible damage to your home by turning off the heat in the winter-time. If you skip a water bill or two or three, you can find yourself homeless when your city or county imposes a water lien and then forecloses on it in due course.

Your children need not just food and drink to maintain health; they also need to be warm and dry. This is a high priority.

 

4. Car Loan or Auto Lease Payments

 

You might be surprised that payment of your automobile loan or lease expense is not higher on our priority listing.

Indeed, in the Detroit Metro area, which lacks a really good, comprehensive (tri-county) public transportation system, it is nearly impossible to function on a day-to-day basis without a reliable car.

The reason making these payments is not prioritized higher here is that car ownership, despite the crappiness of Detroit’s public transportation system, is simply not a matter of life or death as are the above considerations.

Not owning a car is difficult. Not having a home is unendurable.

If you miss a car payment, you will be warned repeatedly by your lender or lessor before the car is repossessed. You will have some opportunity to cure that arrearage—or to decide if it isn’t better to simply let the car go. If you wish to keep it, the filing of a bankruptcy can stop the repossession of a vehicle.

If the car is repossessed, what is the worst that can happen (other than the need to find a new car)?

The car will be auctioned off by the repossessing lender, after notice to you per Michigan state law. It will be sold for some amount of money, depending on the year, make, model, and its condition—and depending on who happened to show up for the auction that day.

Whatever it sells for, that amount will be deducted from what you still owe on the balance of your car loan or lease. Either your original lender or a debt buyer that it sells your note or contract off to after the auction will then attempt to collect this “deficiency” balance debt from you in the usual annoying manner.

If you don’t pay, someone will eventually sue you and attempt to garnish you for it.

That sounds bad, but guess what? It’s no different at the end of the day than any of the credit card and other bills at the bottom of this priority listing. And that deficiency debt, like those other unsecured debts, is totally dischargeable in bankruptcy.

The worst part of losing a vehicle for non-payment really is the need to get a ride or borrow a car while you find some new wheels for your day-to-day needs.

The big, shiny car you lose to repossession is just another unsecured debt, in the end.

 

5. Car Insurance Payments

 

Obviously, if you don’t have a car, or your car is repossessed, the payment of automobile insurance can be disregarded.

Otherwise, it is very common for bankruptcy attorneys in Michigan to encounter clients who have stopped paying their car insurance out of economic necessity.

This is a bad idea.

In Michigan, driving without proper insurance is a criminal offense. Failure to pay credit cards is a very small problem when compared to the problem of having your vehicle impounded, your finances further crippled with court finds and penalties that are not dischargeable in bankruptcy, the possibility of jail-time—and later difficulties maintaining or finding employment due to your new criminal record.

Keep the insurance. Blow off the credit cards. Talk to a bankruptcy lawyer if you are faced with this dilemma.

 

6. Criminal Penalties, Court-Ordered Fines, and Child or Spousal Support Obligations

 

This rather expansive priority list-entry encompasses a number of different financial obligations that are not dischargeable in bankruptcy (generally) and which can also potentially carry criminal penalties if not honored.

While most of them can be handled through a Chapter 13 bankruptcy, they otherwise should not be ignored.

If you are unable to pay court fines, criminal penalties—which does include parking tickets—and especially child or spousal support, your recourse is to appeal to the court which order the payments for a modification of your payment plan or payment terms.

Ignoring them will simply create bigger problems for you and more likely sooner than later.

All of these types of debt should be higher priority than anything listed below.

 

7. Student Loan Debt

 

Should Congress or the President, via Executive Order, ever revise the current mostly-not-dischargeable-in-bankruptcy quality of student loan debt, this entry will sink to the bottom of this priority listing, along with credit card and medical debt.

Until then, it floats here, at #7 in our priority listing of creditors who should be paid first, because it is, generally, not dischargeable in bankruptcy.

Further, the collection methods available to student loan collectors have more teeth than do those employed by other unsecured creditors. Your Social Security payments and Federal income tax refunds may be affected by delinquent student loan debt, for example.

For some professions, licensing or security clearances may also be negatively impacted by delinquent student loan debt.

If you have to choose between a student loan payment and a credit card payment, make the student loan payment—and, then, again, contact a Detroit bankruptcy or student loan lawyer to discuss your options for your long-term financial security.

 

8. Tax Debts

 

Believe it or not, tax debts are easier to discharge in bankruptcy than are student loan debts.

While a detailed discussion of the criteria for the discharge of Federal income tax or Michigan state income tax delinquencies are beyond the scope of this Article, suffice it to say that there is a process for bankruptcy discharge of tax debts that is available to you—eventually.

The first criteria for discharge of a tax debt in bankruptcy is that 3 years must have passed from the date the tax debt became due—if you filed a timely, non-fraudulent tax return.

The analysis is more complicated from there. Discuss with an experienced bankruptcy attorney to learn more about discharging tax debts in Chapter 7 or Chapter 13, or simply paying them off in Chapter 13 over as many as 5 years.

The bottom line is that, unlike student loan debt, tax debts are escapable. Thus, they lie at a priority level one notch below student loan obligations.

That said, failure to pay tax debts can (and will, eventually) result in tax liens on your real or personal property, levy of future tax refunds, and a host of other very serious penalties.

They are, as with the others above, not to be ignored.

 

9. Unsecured Medical and Credit Card Debt

 

Last but not least is everyone else to whom you might owe money. Whether medical debt, credit card balances, personal loans, or anything else of this variety, it is all generally, in bankruptcy, classified as “non-priority unsecured debt.”

In bankruptcy-speak, this means that these types of creditors get paid last after everyone else is paid if the Chapter 7 or Chapter 13 Trustee assigned to a bankruptcy case is distributing money to a debtor’s creditors.

They are the lowest priority for you as well, even outside of bankruptcy.

As noted above, with regard to auto loan or lease deficiency balances, the worst that these creditors can do is to sue you for a money judgment and then attempt to collect on that judgment.

In Michigan, money judgments can be collected in a limited number of ways:

 

• Paycheck garnishment;
• Bank account garnishment;
• State tax refund garnishment;
• Writs of seizure of personal property;
• Placement of judgment liens upon your real estate.

 

While those all sound bad, they are not so easy, often, for creditors to execute—and all such collection attempts must cease upon the filing of a bankruptcy.

 

Deciding Which Creditors to Pay First: The Bottom Line

 

The bottom line, here, is that if you are in the position of needing to decide which creditor you should pay first, you should probably speak with a Detroit bankruptcy lawyer.

Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully assisted thousands of Detroit-area Chapter 7 and Chapter 13 clients for over 30 years.

Contact us now to schedule your free conversation with us.