Who to pay when you can't pay everyone.
By Mory Brenner, Esq.

Who gets money when everyone can't be paid must be a decision you make based on your own situation, not who calls you the most or who you owe what to. In most cases the creditor receiving top priority will be the first mortgage holder on your home. This obligation likely represents a debtor's largest payment. Human tendency evidences payments to smaller creditors when money gets tight. Often credit cards and second mortgages may be paid in full once first mortgage payments cease. This results in a short sighted solution. Soon your credit becomes blemished anyway and foreclosure on your home follows. Negotiating with first mortgage holders can be more difficult than with other creditors. Stop and think of this: If faced with the options of losing a credit card or losing your home which would you choose? Either one may be a valid answer depending on personal circumstances. Your response to these and other questions should dictate your actions.

To properly evaluate your situation try the following steps:

  1. Figure out how much you saved or spent from savings to live last month. This number should be a hard fact. Either you added to an account or needed to borrow from savings, friends or relatives to make ends meet. Write this number down put it aside.
  2. Make a list of all available income for the month.
    1. Use the regular net income of both spouses.
    2. Do not include inconsistent items such as occasional overtime, tax refunds, or gift proceeds.
    3. Are working children or other adults living in the home who could contribute funds? This comment always meets with a lot of resistance, but when the other option may be losing the house, it must be examined!
  3. Make a list of extra income available.
    1. What savings can be used?
    2. Do you have available credit lines or available cash advances from credit cards?
    3. Can you borrow money from friends or relatives?
    4. Look under the sofa cushions (or any others sources which may be unique for you - a 401K plan or whole life insurance policy perhaps).
  4. Make a list of all monthly expenses. (We prepared a monthly expense interactive-form to help clients having us evaluate their debt track expenses they may not have thought of. You are welcome to go to the interactive budget form.)
    1. Essential Expenses - Food, that's it for this category.
    2. Very Important Expenses
      1. First Mortgage (or rent)
      2. Other Mortgages
      3. Utilities
      4. Transportation for work
    3. Important Expenses
      1. Clothes
      2. Taxes
      3. Transportation - other
      4. Credit Card Payments (if credit remains good)
    4. Regular Expenses
      1. Most daily expenses
      2. Household goods
      3. Credit card payments (if credit is already tarnished)
    5. Luxury Expenses
      1. Entertainment
      2. Vacations
      3. Jewelry
    6. Wasteful Expenses
      1. Gambling or Playing the lottery
      2. Falling victim to scams
  5. Obtain your credit report. If you can wait a week or two or if you have recently been turned down for credit or you suspect fraudulent items on your report you may be able to get a free report. New laws allow everyone to see their report free once a year now in any case, you can learn how in the credit guide. If you don't want to wait or would not qualify for a free report you may obtain one here instantly for about $16, follow the links for the credit report. You may want to spent a few dollars more to learn your credit score as well. I have another article just on credit repair and rebuilding for more information on that subject or you can enroll for the free credit improvement guide I built. For more information about your credit you can read an FAQ to understand credit scores or an article explaining what is bad credit.
  6. Complete a personal financial statement.
    1. Prioritize assets. Which do you need to keep, would like to keep, wouldn't mind keeping, and which would you just as soon get rid of?
    2. Which liabilities are reported to credit bureaus?
    3. Does the net monthly figure on the form match the number you put aside back at item #1? Probably not, this time include everything you spend. Make up categories or call items miscellaneous. Go over the expense section again and again. Self employed debtors may need to revisit the income entries. When you have a net figure matches what really occurred proceed. Click here to do this budget analysis online.
  7. Honestly evaluate your problem. Is it long term or short term? Has it been solved or is there a date certain when it will be? Will it reoccur? Is it permanent?

This would be where I reveal the magic formula, but unfortunately none exists. If the answer to each question above were a simple yes or no there would still be thousands of combinations. So which is the best path from here? Contact a debt professional to help you. An attorney who concentrates in debt workouts would be my first choice. Be careful, finding this type of lawyer can be very difficult. Surprisingly few attorneys have any expertise in this field. You will most likely discover firms who advertise themselves under a bankruptcy heading. While most bankruptcy attorneys can complete the paperwork to file a chapter 7 or chapter 13 for you, they won't be inclined to discuss other options. Many have never done these negotiations, some don't even know settlements exist. Others claim to understand this concept but prove to be inexperienced or inept. Filing bankruptcies in volume can be quick easy money for the law firm. Do not fall into this trap.

If you can not afford a lawyer look for a non-profit organization such as Consumer Credit Counseling Service. Be wary of individuals or for profit agencies offering these services. Some don't possess the knowledge to complete the task, others are out right thieves. Many just take your money and put you in touch with a lawyer they have selected based on fee arrangements between themselves and the attorney, not on the attorney's qualifications.

Sometimes people who have never been late on a payment in their whole life think they have a financial crisis when find themselves making payments a few days late. Often if your credit has not gone bad yet and you still have a strong income a debt consolidation loan or a credit card balance transfer may be all you need. Be wary that these choices in the wrong circustances escalate the problems and deepen the issues. Be even more careful about using emergency savings and most cautious of all about accessing retirement funds.

No matter what you do take an active role. Educate yourself, learn about the various debt options and be a part of both the professional selection and decision making process. Lawyers may try to push you toward a bankruptcy filing, consumer agencies lean against it. This does not mean you should do your own negotiations any more than you should take out your own appendix. Saying you can't afford a lawyer is like being too sick to go to the doctor. Lets take this analogy one step further. If most bankruptcy attorneys were doctors they would operate on every patient who came in with a slight stomach ache. Some consumer agencies would tend to keep a patient on antibiotics and not operate even if it meant the patient would live in the hospital for the next ten years. Many debtors ignore their credit card debt or mortgage foreclosure problem so long they need one or the other or something inbetween. Don't let any talk you into a debt help solution just because they say so.

Below I have included guidelines to follow. Use them to better understand your situation so you may take a more active and informed role in your future. These should not be used as a "do it yourself" program, get professional help whenever possible. The guide may also be used to help weed out incompetents in this area. If someone's advice sounds contrary to most of what I'm saying you may have an unusual situation or you may be talking to a quack. If you sense you're in a duck marsh get a second opinion. If you think you're not being properly represented and you verify this don't be afraid to switch lawyers or hurt their feelings. Losing a client they never should have advised in the first place won't change their life. Losing your house or filing an unnecessary bankruptcy will surely change yours. To find out more about debt options, click here.

  1. If you want to save your home, pay your mortgage first. If you are already behind formulate a way to catch up, then call the bank, tell them your plan and why it will work. Do the same for all mortgages or rent.
  2. Communicate with your creditors. Don't wait until you get in trouble. Before you miss a payment give them a call and let them know you need help and why.
  3. Never waste money. No lottery, no gambling, no get rich quick schemes. Be very wary of scam artists, they will be out to find you.
  4. If your credit has already turned sour don't try to rebuild credit until the current problems have been resolved.
  5. Paying more than the minimum payments on credit cards does not give you a better credit rating.
  6. Don't become emotionally attached to any asset. Re-evaluate all of your possessions and don't be afraid to give them up. Should you be driving that Lexus or would you be better off in an Escort for a while? Maybe necessity dictates moving to a smaller house or a less affluent neighborhood. Evaluate your assets and property without emotional attachments.
  7. Identify the cash drains and plug them up. This may mean closing a business or losing an income property.
  8. If you are not making mortgage payments or they won't accept your checks save the money. Don't spend it on other bills. You may need it to save the house. The one ranks as one of the worst mistakes people make when facing foreclsoure.
  9. Don't make arrangements you won't be able to keep. Tell creditors what you can really do, not what you think they want you to say. Often professional foreclosure negotiators or unsecured debt negotiators can get a better deal for you.
  10. Do not spend money on house repairs if you may be losing the house.
  11. Explore all options but be ready for the worst, including an exploration of the rental market.
  12. Formulate a plan as soon as you see the first sign of trouble do not wait!
  13. If home foreclosure looms above you ignore the collection agencies from the unsecured creditors. You have more important things to worry about. Don't let them bully you into giving them anything. You may need every cent to save your home.
  14. Don't waste money or flaunt your spending. I once heard the story of a debtor who had almost completed negotiations with a bank for a deeply discounted settlement. When the loan officer called to finalize the plan she was told the debtor was vacationing in the Caribbean. She figured if he could afford the trip he could afford to pay her in full and the deal was off.
  15. Don't file for bankruptcy unless it's really the right thing to do. It's not the only option many alternatives to bankruptcy await your exploration. If your attorney doesn't explain the other options find a new bankruptcy attorney. If the bankruptcy option works the best for your situation don't be afraid or ashamed to do it. Use this site to get a free second opinion before filing bankruptcy.
  16. Find the time to deal with this problem. If your house matters to you, this is more important than almost anything else. If you hate the house anyway, don't pour money in to save it, explore other residence options.
  17. You will not be put in jail for falling behind on your payments. You will not be shunned by the whole community. Most people will never know about your situation unless you tell them. Yes, this even goes for small towns with legal notices in the paper. Those who do find out will soon forget. Personal issues always interlace with your debt issues, but you can not chart your course based on your emotion alone.
  18. Don't pour money into black holes. If your situation has taken a permanent downturn to the point that an asset will ultimately be lost stop wasting savings or current income just to delay the inevitable. You will need that money for other things, such as finding a rental after a foreclosure.
  19. If you have bad consumer spending habits including but not limited to shopping addiction or compulsive spending change the way you budget money even if it means seeing a mental health profesional for help.
  20. Don't spend money on big gifts or celebrations. Your daughter would surely rather have a smaller wedding than homeless parents.
  21. If you have been able to save some money don't leave it at a bank you owe money to. They might be able to take it from you without notice.
  22. Once in the foreclosure process call a lawyer before paying anything. When you've reached this stage little time remains. You'll need someone familiar with all legal options.
  23. If you really want to keep the house be prepared to work for it. This may mean cutting items you thought were essential like cable TV; or getting a second job.
  24. Think twice before not paying income taxes or your employees withholding or FICA match. These will probably not be dischargeable in bankruptcy.
  25. Once you know you will be filing a bankruptcy do not run up a bill or credit card subject to discharge. This would be fraud, not to mention non-dischargeable.
  26. Perhaps the most important, don't lose hope and don't give up.

  27. Click here to learn for how to avoid mortgage foreclosure on your home.

    Web Sites Written or Edited by Mory Brenner, Esq:

    Bankruptcy Alternatives / Debtor's Options
    FAQs examining the debt itself, personal issues and many resolution options including workouts, payment and bankruptcy.

    Debtor Links
    Sites for debtors on bankruptcy, workouts, credit counseling, IRS, credit rebuilding, and more! US, UK and Canada.

    Alternative Mortgage Sources USA
    Links to residential lenders and mortgage brokers throughout the United States offering loans to borrowers with credit problems, bankruptcy or foreclosures on their credit report. Apply On-Line service available.

    Alternative Finance Sources USA -Car loans
    Links to lenders and finance companies throughout the United States offering re-financing, new or used car loans to borrowers with credit problems, bankruptcy or foreclosures on their credit report. Includes a nationwide used car search engine.

    Free Credit Repair and Rebuilding Guide
    Go step by step through the process of helping to increase your credit score or establishing good credit when you have none.

    For information on this page please visit the contact page.

    Nothing contained herein should be construed to constitute advice for your personal circumstances. This is intended as a peripheral exposure to the various options available, but by no means is this a comprehensive or exhaustive analysis of the bankruptcy laws or their alternatives. Whether or not you should file a Chapter 7 bankruptcy, Chapter 13 bankruptcy, or any bankruptcy, will vary depending on your personal circumstances and should only be undertaken after careful consideration, analysis and after consultation with an attorney experienced with such matters. These pages may contain information and rules peculiar to the Commonwealth of Massachusetts.

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    Web site design by Mory Brenner. This page, and all contents, are Copyright (C) 2010 by

    Financial Firebird Corporation, 150 North Street Suite 40, Pittsfield, Massachusetts 01201.

    The most recent update of this page occured on 06/23/10.