Most people who have debt problems are struggling to pay several different bills. Frequently, they are struggling with a home mortgage, a car payment, medical bills, credit cards, and perhaps other bills. According to the Atlanta Journal-Constitution, more homeowners who are struggling to make ends meet are choosing to pay their credit cards than their mortgage. While this may be the “least bad option” in some cases, frequently it is a big mistake that could cost homeowners thousands of dollars and possibly their home.
Why Consumers are Paying their Credit Cards over their Mortgage
The article gives several reasons why homeowners choose to pay credit card bills over home mortgages. A common reason is that the homeowners accept that they are losing the house and want to protect the line of credit from the credit cards. Perhaps they are living off their credit cards and need the cash flow to buy necessities. Others mistakenly think that they are preserving their credit by making payments on the cards. Still others think that if they don’t pay their mortgage, they will be able to get a favorable loan modification.
Secured vs. Unsecured
In most cases, this is a big mistake. The law treats mortgage debt and credit card debt differently. Mortgages and car loans are what is known as secured debt. For a secured debt, if the borrower doesn’t pay, the creditor can take specific property and sell it to satisfy the debt. In the case of a mortgage, the creditor can foreclose on the house and sell it at auction. For a car loan, the creditor can repossess the car and sell it. If the sale does not bring enough money to cover the balance of the loan, the creditor can sue for a deficiency judgment against the borrower for the rest of the money owed.
Credit card debt, on the other hand, is what is known as unsecured debt. The creditor has no right to any specific property. Instead, they must bring a lawsuit and get a judgment. Then, they have to collect on it. North Carolina does not allow wage garnishment for collection of credit card debt, so the creditor must find specific property to take. They cannot take property that is covered by a security interest, like your mortgaged house or the car you haven’t paid off, unless they pay the secured creditor first. They also cannot take property that is exempt under North Carolina law. Frequently, there will be no property that the credit card company can take to satisfy the judgment.
These debts are treated differently in bankruptcy as well. Generally, secured creditors must be paid or the property must be given back to the creditor, while most if not all unsecured debt is discharged and you never have to pay it back.
Consequences of Default
What this means is that credit card companies are all bark and no bite, at least in North Carolina. They will try to annoy, scare, or threaten you into paying, but frequently there is little they can do to get their money. A judgment against you is never something to be taken lightly, but there is relatively little they can do with it. As a result, frequently, credit card companies will settle for a fraction of the amount owed, especially if they have not had to file a collection lawsuit.
On the other hand, a secured creditor can take the property. They are protected in bankruptcy as well. They will get at least what the property is worth, if not more. If you stop paying your mortgage, you will eventually have to pay that money even if you get a loan modification, often with penalties and interest.
So What Bills Should I Pay?
While generally it is better to pay secured debt than unsecured debt, every situation is unique. Additionally, taxes, student loans, and child support are special kinds of debt that the law makes more important than ordinary unsecured debt.
Furthermore, the answer may be different in different states. For example, Georgia has wage garnishment for private judgment, unlike North Carolina, but makes it more difficult for a lender to get a deficiency judgment if the house is sold for less than the amount owed. What is prudent in Georgia may be foolish in North Carolina and vice-versa.
If you have questions about which bills you should pay, contact an attorney in your state who is knowledgeable in bankruptcy and debt relief. While people with debt problems are hesitant to talk to an attorney for fear of running up large fees, many attorneys in this practice area offer free initial consultations. Even paying a fee of a couple hundred dollars for a consultation may save you thousands in the long run.