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The good news is you get to direct how that payment is applied.  You should do so, because if you do fail to direct the application of the payment to a particular debt, the creditor may apply the payment as it chooses to.

There is an exception to these principles, called the “Identical Property” rule.  The Identical Property rule provides that when a payment is made and is known by the creditor to have been derived from a particular source, the creditor must apply the payment to that debt associated with that source.  A good example is as follows:

  • Debtor has a car loan and a credit card with the bank.
  • Debtor sells the car and sends a payment to the bank, but does not indicate whether the payment should be applied to the vehicle loan or the credit card balance.
  • The bank, if it knows that the payment is the sale proceeds from the car, must apply the payment to that loan.
  • If the bank does not know that the payment represents the proceeds from the car sale, the bank may apply the payment as it chooses.

It is a good idea to always designate on your payments the account to which that payment should be applied. 


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