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STEP 2: Help With Debt Problems:
Deciding Who To Pay First?

The next step in the Debt Ditch "help with debt problems" Solution is to figure out how to distribute your limited supply of money.

For some, debt problems are serious enough that you are trying to decide whether you should miss your mortgage payment, your tax payment or your credit card payments. This step in our debt elimination strategy will help you decide how best to allocate your limited dollars, based on what is most important to pay first.


1. Most Important to Pay: The "Need to Live" Items

In our world, there are some things that you need to pay for in order to live comfortably. We need a roof over our heads, warmth, and food on the table. Here are the items that are considered "must pay first":

Mortgage/Rent
checkmark bullet  Keep the roof over your head no matter what.

Necessary Utility Bills
checkmark bullet  By "necessary" utility bills we mean heating, water and lights. That super duper cable package is an option, not a necessity.

Groceries
checkmark bullet  The basics of eating well and maintaining health are all important.

Health Care Insurance or Payments
checkmark bullet  Essential in case someone needs emergency care or health treatment.

Child Support
checkmark bullet  A "must do" for any non-custodial parent. Not only will you sleep better knowing your children are taken care of, it's the law.

Car Payment
checkmark bullet  If a car is necessary to get yourself to work, make sure you make your car payment.

2. Don't Ignore the Government

Taxes

File your taxes when they are due to prevent penalties and steep interest payments (up to 25%!). In the US and Canada (and I am sure many other countries as well), the federal government's tax department will develop a payment schedule with you if you can't pay your tax payments in full.

It's always best not to annoy the government, so do your best to keep up-to-date with taxes.

Student Loans

Student loans are usually backed by the government. When you neglect to make your loan payments, the government can go so far as to garnish your wages or retain any tax refund you might have owing.

Again, the government is usually willing to work with you and can stretch out your payments or even suspend them for a period of time under unusual circumstances (for example, if you are out of work). So if you think you can't make your student loan payments, talk to them and see what you can work out.

3. Unsecured Loans and Credit Cards

Credit card debt, store loans for large items of furniture or appliances and bank loans are the next most important category to pay. We'll show you in another step - how to decide which of these to pay off first as part of your new get out of debt plan.

There is a statute of limitations on credit card debt. Learn more here.

4. Loans from Family and Friends

Listing loans from family and friends last doesn't mean that they are not important or that you shouldn't do all that is in your power to pay them off. We certainly believe in paying off all your debts and will show you how to do that as you proceed through the Debt Ditch Solution. But if you are in a real bind, help with debt problems can begin with talking to family and friends and being honest with them about your situation.

If you can't pay them back right now, even a little bit, a friend or family member may agree to wait for payment until you get back on your feet. Tell them about this program and the effort you are making to get to the point where you can pay them back.

checkmark bullet  Get more help with debt problems in the next Debt Ditch Solution action step here.






Update 2009 ...

Suze Orman Says: Pay Only The Minimum On Your Credit Cards

You may be familiar with the personal finance guru, Suze Orman. Whether you are a fan or a critic, she does have a solid reputation for offering sound money management advice and help with debt problems. However, her recent pronouncement has created a heated debate in the financial community.

Suze is quoted as saying: "The problem is that most credit card companies are either reducing your credit limits, raising your interest rates and are even paying you to close down your account."

Suze states that: "If you have an unpaid credit card balance and not much saved up in emergency savings I need you to listen up. My advice has changed. I want you to only pay the minimum due on your credit card balance and instead make it your top priority to build as much of an emergency cash fund as you can."

"If you do not have a stash of cash in an emergency fund and you have been using all your extra money to pay down your credit card debt and they keep closing your cards down ... what are you going to live on if you lose your job? Chances are you may not have any available credit, or too little credit to use in the event you are laid off. Nor will you be able to get a new card if you are unemployed."

We believe her assumption is that you have several thousand dollars worth of credit card debt, little or no emergency fund, and mediocre credit. If loosing your job is a worry, Suze’s advice might resonate, since finding a new job in the current economy is truly frightening.

We would strongly recommend that you speak with professionals who have your best interests in mind and can offer you advise and help with debt problems based on your personal current financial situation.



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