Like a lot of people, I got laid off because of the pandemic. (I managed a restaurant.) I saw it coming, so I saved as much as possible. But I got bills to pay, and not enough to cover them all. Which ones should I pay first so I can stave off collections for as long as possible?
I’ve been making payments on some elective surgery I had a while back, got $5,000 on my credit cards, a couple of store accounts my wife used (but we closed), and of course, rent and utilities. I also have around $9,000 left on my federal student loans and maybe $2,500 left on a private student loan. Are some of these easier to ignore for a little while till I can figure things out?
– Paul in New York
Steve Rhode, The Get Out of Debt Guy, replies…
We’re living in crisis times. So, I’m going to say something you wouldn’t expect to hear from a financial expert: Very few of your bills matter right now.
You must absolutely reorder your priorities to shelter, clothing, utilities, transportation, and health insurance.
Those bills should be paid first out of whatever income you have coming in. You need to stay healthy and safe – so when this pandemic finally ends, you have enough physical and mental stamina to recover.
Let’s break down the rest…
Student loans: get a plan
You need to lower the monthly payments on your federal student loans. Believe it or not, that’s not hard to do. You need to get on an Income-Driven Repayment Plan. If you need help selecting which one is the right for you – given your marital status and income – Debt.com can match you up.
Unfortunately, private student loans don’t have these programs. You can call and ask for a deferment on making payments, but that’s probably a longshot at this point. (Some private issuers did indeed grant deferments early in the pandemic, but not so much now.)
If you can’t afford them then you can’t afford your private student loans, a partial payment is worthless. Ironically, defaulting on your private student loans will increase your balance and land you in collections – but it will also give you a better chance at settling those loans for less with payments when you can afford them. That sounds like a risky move, and while it’s not ideal, here are more of my thoughts on the issue.
Don’t fear collections
Going delinquent on your payments – like so many people are doing these days – will show up on your credit report. Your credit score will plummet.
But credit can be easily rebuilt. Credit scores can rebound.
Meanwhile, you’ll likely suffer from debt collectors constantly bothering you. My general advice for dealing with them is: Don’t be a jerk. There’s no need to scream and yell. They’re just doing a job. Some will try to shame you into making a promise to pay, and when you miss the payment, they’ll use it against you.
If they call and you answer the phone, be nice and say you can’t afford to make any payment right now. Then say goodbye and hang up. If you don’t want to deal with them, let them roll to voicemail.
If a creditor decides to sue you over a debt, there are legal ways to deal with that and make the debt go away, but let’s not get ahead of ourselves.
When you’re in collections, it can feel shameful, stressful, and sap your mental health. But the reality is: You’re not on fire, the people you love are still around you, and this is just a financial problem. You will get through this.
Once you can see a return to work on the horizon, you should consider bankruptcy to get a fast, fresh start. That sounds terrible, but as I’ve written often, bankruptcy is simply a tool. And it works.