How to Triage Bills – Part 2
The premise of this two-part post is that a family member is abruptly laid off or temporarily disabled due to, for example, a health challenge. The family lacks an emergency fund, and simple mathematics says income won’t now cover bills + debt payments. How does the family decide which bills and debts to pay and which to let go for now?
In Part 1 of this mini-series, I suggested how the gap between income and expenses could be narrowed as much as possible. (And the commenters had ideas too.) Let’s say that’s been done, but still the family budget is in deficit. Now what?
Income Still Too Low to Meet Every Bill: Rationing and Triage
After you get through the process explained in Part 1, your bills may still outstrip your income. Your challenge is how best to ration the limited cash you have. You’ve got to triage and prioritize your obligations until you run out of money, then deal later with past due accounts. But how do you prioritize your bills?
First, I’ll suggest some overarching principles, in no particular order:
- Stay safe and secure
- Minimize damage to your credit score
- You need food and water
- Avoid running up more high-interest debt
- Maintain your ability to mount an effective job search (if job loss caused the crisis)
- Bankruptcy is your ultimate trump card, if and when all other options are exhausted
Remember, when rationing cash among accounts and needs, you can’t look at a particular need or obligation in a vacuum. You’re in a nasty situation, and bad things are likely to happen no matter which bills you decide to skip. (This reality may inspire you to save up an emergency fund once you get back on your feet.) The idea is to pick & choose the least bad things, not just in the short run but also in the long run. Here are some ideas for how to think about prioritizing different categories of bills:
- Credit Cards: To me, these are a low priority. More important is food, shelter, security, health insurance, and maintaining your ability to do an effective job search. Once your income situation is back to normal, a Debt Management Plan is an excellent tool for dealing with past due credit card accounts. Further, bankruptcy can rid you of credit card debt should your crisis continue for a prolonged period. Yes, your credit score will take a hit if you stop paying on credit card accounts but, again, if you see a way out of your dilemma with no damage to your credit, you need not be reading this post. If you can make some credit card payments but not all, it’s best to minimize the number of accounts that become past due. Start making payments on those with the lowest minimum monthly payment and work your way up until you run out of money.
- Utilities: Clearly you need to keep the power, heat, and water service going. That said, you might learn when you talk to your utility providers (see Day 1) and do your own research that turning off your service for non-payment requires a lengthy, complicated set of steps on the part of the utility provider. And these providers may have established programs for paying off overdue balances over a considerable period of time and with low or no interest and penalties. All of these factors should play a role in when and if you pay utility providers, but don’t risk shut-off!
- Telecom: Internet access is crucial to an effective job search. And you must have a telephone number for your resume and job applications. If job loss caused your crisis, keeping these services running is a high priority.
- Mortgage or Rent: You may have a sympathetic landlord who will accept late or reduced rent for a while, but few mortgage providers will let you skip payments without consequences. Talk to your mortgage provider, but don’t expect a lot of sympathy. Making your mortgage payment has to be a high priority. But usually it’s a big chunk of the family budget and so a tempting target for spending cuts in a crisis. If you have to let it go, then you must. And know this: Research the foreclosure process in your state because you may be able to live in your house for as long as a year or more—making no payments—before foreclosure finally forces you out. You can be working during this year to rebuild your family’s financial foundation. Clearly, this is not a strategy you should be eager to pursue, but if you find yourself in a world of ugly options, nothing should be off the table. Regardless of whether you make the mortgage payment, keeping up on home insurance is a high priority. If you’re making insurance payments through your mortgage payment and decide to stop making the mortgage payment, contact your insurance provider directly to learn how to pay the premium.
- Car payment: Losing a car is likely to handicap severely your ability to regain employment, assuming job loss caused the crisis. The payments—and the insurance—are therefore high priorities. If your car’s value is considerably more than the loan balance, selling it, paying off the loan, and using the remainder to buy something that runs (and for which collision and comprehensive insurance makes little sense) is an option.
- Health insurance: If you lost a job that included health insurance benefits, you should have the option to continue that insurance under COBRA. You’ll be stunned by the premium. You’ve got to make a tough choice here: To afford health insurance, you may have to forgo something big like mortgage payments. It’s unfortunate you’re forced to make gut-wrenching decisions like this, but that’s the system in the U.S. (and those are the sorts of options you have without an emergency fund). The best choice will likely be dictated by the specifics of your family’s health status. If I were young, single, healthy, and likely to find work soon, I might opt to pay the mortgage instead of a COBRA premium. (And I’d be very careful to avoid injuries.) But if were married with young kids and a pregnant spouse, I’d be keen to maintain health insurance above nearly all else.
When you have to make choices about which bills to pay, recognize and accept that you’re going to be hit with negative consequences. Rather than wasting energy on stress about those consequences and chastising yourself for not creating an emergency fund, do your best to focus your mind on creating a plan to 1) stay afloat while minimizing the damage, and 2) recovering to the point where you can begin repairing the damage over time.
How Would You Decide?
What would be your priorities if you found yourself with no savings and too little income to pay all of your bills? How would you make these difficult choices?