By Laura Royer
When facing a financial crisis, a military household may not be able to pay all of the bills. If that is the case, it is important for the Personal Finance Manager (PFM) to help the client understand how to prioritize which bills are more critical than others. Often, clients will take their limited cash flow and pay down a debt that has fewer financial implications than others. Therefore, when working with a military family that is struggling to pay all of their bills, the PFM can help them understand how to decide which bills are more critical than others.
Secured vs. Unsecured Debt
First, it helps if the client knows the difference between the types of debt they have to pay. A secured debt is a debt that has collateral that guarantees it. Examples of this type of debt include a mortgage, a vehicle loan, furniture, or a legal judgment that garnishes wages if not paid.
Unsecured debt, while important, does not have collateral to hold the debt. This means a creditor has no collateral to go after if the bill is not paid. Examples of this type of debt are credit cards, personal loans from family or friends, medical loans, charge accounts, or utilities.
Prioritizing Debt into Three Categories
Next, it’s important for the client to understand debt prioritization in a time of financial crisis. There are three classes of debt priority.
- High-priority debt is any debt that has serious consequences if it’s not paid. Examples of high-priority debt are rent or a mortgage, a utility bill, child support, a vehicle loan, tax liens, or other secured debts.
- A medium-priority debt is a debt that won’t necessarily cause dire consequences but could be painful or concerning for the family. These debts include car insurance (unless legally required), medical bills, a vehicle payment on a car that is not the client’s primary mode of transportation, or student loans.
- Lastly, there are low-priority debts that usually do not have an immediate or devastating effect if one fails to pay. These debts include credit cards, department store or gas cards, loans from friends and family, subscriptions, legal, and accounting bills, and other unsecured loans.
Pull Together All of the Debt Information
Once a family in a financial crisis understands the types of debt and how to prioritize it, have them write down all of their debt. This should include the name, balance, minimum payment, interest rate, past due amount, if the debt is secured or unsecured, and classify its priority level.
Contact the Creditors
Next, the family should contact each creditor as soon as possible to discuss some sort of workout plan. Don’t wait until the accounts have been turned over to a debt collector. At that point, most creditors will have given up on the borrower. They should explain their hardship and be able to give the creditor an idea of how long they will be in this financial crisis. A cushioned guess is better than an unknown answer for the timeline.
The family should tell the creditor what they have already done up to this point to resolve the financial crisis and have a few resolutions in mind to work with the creditor. When speaking to the creditor, have the family ask about other payment options that could be worked out. The family should try to work out a modified payment plan that reduces the payments to a more manageable level.
What Happens if Borrower Cannot Pay
If payment is not possible, be sure to review how repossession works with the borrower and explain that involuntary or voluntary repossession has the same impact on a credit report.
While creditors have no obligation to agree to negotiate the amount a person owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including a failure to make monthly payments. That can result in a negative entry on the individual’s credit report. If the family does not pay their bills on time or has to let one go for a temporary amount of time, it’s important for them to understand the negative activity will be reported to their credit report once the debt is 30 days delinquent. This 30-day delinquency will impact their overall credit score.
The military family should also understand that in many situations, creditors may have the right to sue them to recover the money they owe. In some instances, when creditors win a lawsuit, they have the right to garnish one’s wages or put a lien on their home. Finally, the Internal Revenue Service may consider any amount of debt forgiven to be taxable income.
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