Expert Q&A

How to prioritize debt payments when your income falls


It’s all too common these days: A down-on-his-luck cardholder struggling to make ends meet confronts more bills than he can pay, and needs help prioritizing them.

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Question for the expert

Dear Credit Care,
I was laid off and decided to retire when I could not find a job. My wife has been unable to find work. We are having trouble paying our credit card bills. Should we pay what we can or just stop paying altogether? — Jay

Answer for the expert

Dear Jay,
A drastic decrease in your income is one of the most difficult financial storms to weather. The best way to help make it through this storm is to have an adequate emergency savings cushion to close the gap in an unexpected and immediate drop in income. Savings of six to 12 months of living expenses allows time to get back on your feet and either increase your income to the level it was or decrease your expenses to the level of your lower income.

Without a savings cushion, however, the fall after an income cut is much more painful. You are forced to make tough decisions right away. You ask yourself: “What bills will I pay, and what bills will go unpaid?” With an income reduction, the first thing to do is prioritize what you need to pay and cut as many expenses as you can. So, the answer to the question of what to pay and what not to pay is this:

  • Pay for your shelter (mortgage or rent), transportation and food first.
  • It is also important to not let important insurance coverage lapse.
  • Unsecured debt, such as credit cards, go to the back of the list. Pay those last, if any more money is available.

It is important to remember that each person will have his own unique list of priorities. You should realize that just because a category of debt has a lower priority does not mean it isn’t important. It simply means you need to contact and make payments to the higher priority creditors first.

Your question about paying what you can on your credit card accounts is problematic if you cannot afford to make at least the minimum payment due. Your creditor will consider a payment less than the minimum amount due as a late payment and likely charge you a late fee, which can be as high as $35.

My recommendation would be to contact your card issuers and let them know that you have been forced into retirement and, as a result, have a much lower income. Ask them if you qualify for a hardship program where your interest rate and payment would be lowered. Based on the monthly amount that the card issuer offers with a hardship program, you will have a better idea if you can continue making payments on your cards.

If you just do not have enough income to cover your credit card payments even with lower interest rates and payments, you may need to consider consulting an attorney. With your attorney, you can explore your options of settling your debt for less than the full balance owed or filing for personal bankruptcy. You can find a pro bono attorney in your area by searching the American Bankruptcy institute’s Pro Bono Resource Locator.

Before filing for bankruptcy, you will need to be sure that you have a workable spending plan in place for your reduced income. This is because you will not be eligible for bankruptcy protection again for many years.

Handle your credit with care!

See related:How to set up an emergency savings fund, A generic budget: guideline for spending categories, To cut back on spending, go BIG, How to prioritize debt payments

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