WHAT DEBTS TO PAY OR NOT TO PAY?

During a time of financial crisis, many families will be faced with the difficult challenge of having to stop paying all their debts or to just default on certain debts that have less priority, just to be able to keep up with other high priority debts and avoid consequences.

Often times, clients assume that If they cannot pay their mortgage, at least they can keep up with their credit cards debts.

This is usually a recipe for disaster and a very bad idea.

If you and your family do not have enough money to make full payments on all your debts or your high priority debts, the first steps may be to try to negotiate with secured creditors to accept lower payments, modify your loan terms or to defer payments during a brief period of time or apply for forbearance.

High Priority Debts:

High Priority debts are the kind of debts that if not paid timely, will have quick, immediate, irreparable consequences.

  • Court judgment 
  • Criminal justice debt
  • Automobile loans or leases can quickly result in the creditor repossessing your car after you miss only a few payments.
  • Rent payments for your home or business can quickly result in an eviction action if you do not timely keep up these payments.
  • Homeowners or Condominium Association dues can quickly result in suspension of access to common areas, liens, large attorney fees and cost and quickly turn into foreclosure
  • Utility bills Non-payment of utility bills can lead to termination of gas, electric, water, and other utility service.
  • Child support and other Marital Support Obligations will generally not go away and can result in very serious problems, including the inability to file bankruptcy and obtain a discharge, loss of you driver’s license privilege, wage garnishments and even being held in prison for contempt, for non-payment.

Debts That Become High Priority Quickly:

Debts that quickly become a high priority are the kind of debts that if not properly and quickly evaluated will have substantial impact on your life. Therefore, devising an early and proper default strategy for these kinds of debts will provide you with the best chance of survival.

  • Home mortgage delinquencies if you miss a month or two you are unlikely to face foreclosure, but it can affect your credit. However, if you get far enough behind, you may have to face the loss of your home and foreclosure.  It is extremely important to always consult with a foreclosure defense/ bankruptcy attorney before you default on your mortgage, or for the purpose of modifying your mortgage payments to make them affordable or delaying them and defending a foreclosure action. More on mortgage debt is found in Bankruptcy
  • Real estate taxes and Insurance If you do not have an escrow account with your mortgage lender, you are responsible for timely paying your own property taxes and maintaining property insurance. While the non-payment of property taxes or insurance will not result in the immediate loss of your home, at some point, your home will be subject to forced placed insurance, tax liens, penalties including foreclosure and tax sale.
  • Taxes owed to the IRS. Even if you do not pay your federal income taxes when due, always file your tax return on time, or file it by the deadline set by any requested extension. Thereafter, you can oftentimes delay paying taxes without serious adverse consequences. Remember that filing your taxes is a pre-requisite to be able to file for bankruptcy protection. But at some point, it will become critical to work out a payment arrangement with the IRS, because the IRS can seize your bank account, garnish part of your paycheck and federal benefits, and even your put a tax lien on your home.

Low Priority Debts:

Low priority debts should not be paid ahead of high priority debts if it will prevent you from appropriately dealing with high priority debts.  Low priority debts usually become higher priority once a lawsuit has been filed in court.

  • Medical debt, such as payments due hospitals, doctors, other medical professionals, dentists, and ambulance companies. This debt does not generally affect your credit rating for six months, is unlikely to involve high interest rates or late charges, and it could take a year or two before you are sued, if you are ever be sued at all. Medical debt does not result in immediate loss of your property or income, unless you are successfully sued on the debt. More on medical debt is found in Bankruptcy.
  • Credit card debt. You will not be subject to seizure of bank accounts, income, or property unless you are successfully sued on the debt or there is a default judgment taken against you. Debt collection contacts can easily be stopped. This is discussed in Chapter 2. Interest and late charges may even stop after you are six months delinquent. Credit card debt is explored in Bankruptcy.
  • Debt owed friends and relatives. Non-payment is not going to harm your credit rating or result in lost property or wages, and you may not even be charged interest. Of course, you want to repay these debts, but your friends or relatives who lent you money are unlikely to want you to lose your home or car just to pay them back sooner. In addition if you pay them and you do not pay your credit cards (for example) and you later file for Bankruptcy the trustee may categorize this payment as a preferential insider payment jeopardizing your friend or family member to Federal Preferential Transfer action.
  • Federal student loans are generally not in default until you are nine months behind on payments, but then you risk being in default, seizure of your tax refund and your Social Security or other federal benefits, wage garnishment without a court order, and denial of new student loans and grants or federal loans.  A Chapter 13 Bankruptcy or a student loan consolidation can help you eliminate, delay, or reduce your student loan payments. These strategies work best when you are not in default, and when you are represented by an attorney, so focus on your student loans as soon as reasonably practical. If you experience hardship, always consult with our law firm or ask for a deferment, before you stop making payments.
  • Private student loans. These loans typically do not involve collateral, and special remedies available to the government to collect federal student loans do not apply to private student loans. Remember, private student loans are often times dischargeable through a bankruptcy.
  • Debts you owe as a co-signer. If you co-signed for someone else’s debt and put up your home or car as collateral for the other person’s loan, the loan is high priority. Other loans for which you are a co-signer but have put up no collateral are low priority. If others have cosigned for you, tell them about your financial problems so that they can make plans and adequately protect their credit.
  • Deficiency actions after your car or home is repossessed. If a creditor repossesses your car and sells it for less than the amount owed on the car loan, it may seek the difference from you, called “a deficiency.” This is a low priority debt because you have already lost the car, your credit rating has already been damaged, and the creditor can do little other than sue you. If you are sued, you often have solid defenses that prevent the creditor from recovering any deficiency.  However, if the creditor prevails in the lawsuit, the debt becomes a judgment and thus a high priority.
  • Charge accounts or other debts owed to merchants, particularly if the merchant has not taken as collateral the goods sold. This is also a low priority debt because if you stop paying it will only affect your credit rating and your credit rating may become temporarily damaged. However, often times you can settle these debts for less than what you owe since the creditor can do little other than sue you. If you are sued, you often have defenses that prevent the creditor from immediately recovering against you. However, if the creditor prevails in the lawsuit, the debt becomes a judgment and thus a high priority.
  • Small loans even when they take household goods as collateral. Non-payment is unlikely to cause you to lose household goods collateral because creditors rarely seize them. They have little market value; a court order is usually needed to seize them. It is time-consuming and expensive to obtain that court order.

Remember to always consult with our law firm BEFORE defaulting on any of your payments.

 

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