Dealing With Debt If You Lost Your Job
Losing a job sucks for everyone, but when you’re in debt, it’s even worse. Your debt relief goals are not being met, or worse, you don’t even know how you’ll make the minimum payments. There is also stress and anxiety associated with not knowing how bills will be paid. There are several things you can do to make the situation less dire.
When you’re desperate, it’s easy to fall into the debt trap. Unfortunately, a lot of people do this, and they end up trapped in the paycheck to paycheck cycle for years. We’ve detailed a few common debt traps here , but in general they are:
For the most part, you want to avoid these options, if at all possible. Here’s what you should do instead.
Find out if you are eligible for unemployment
Depending on how you quit your job, you may be eligible for unemployment benefits. This is an obvious first step for most people, but you want to take advantage of whatever help you are applying for, especially if you are in debt. We’ve already told you how to apply before and the rules differ depending on your state.
This map will point you in the right direction. Check out the rest of our Survival Guide for the Newly Unemployed to learn more about how to get back on your feet and find a new job.
Create an emergency budget
You will likely find it difficult to make ends meet during this time, so it is imperative to keep your living expenses as low as possible. This means creating an emergency budget .
If you have a spare fund, that’s great. You will have the money to get them out during this time of turbulence. But you still have to draw up an emergency budget because you don’t want to invest more in your emergency fund than you need to. Also, your emergency fund is designed to fund your bare necessities, not your lifestyle.
Look at your current budget first and then follow these steps:
- Reduce all non-essential costs.
- Find ways to cut fixed costs, such as cutting your bills .
- Reassess your debt goals (more on this later).
- Be economical with variable costs such as groceries, fuel, and other expenses .
Don’t worry, this is not your everlasting budget. It should be strict, but it’s only meant to keep you afloat.
Adjust debt payments
Part of creating your emergency budget is reassessing your financial goals. This means that you will have to adjust your plan for getting out of debt . Most experts recommend that you stop making any additional debt payments if you need cash. For example, Liz Weston tells CreditCards.com that it makes sense to cut your payments in an emergency:
Pay your credit card bills – make sure they are much smaller. If you’ve always paid off your balance on time and in full, you can dip into this emergency fund to keep paying your cards on time – but only after you’ve completely cut costs and minimized card purchases. “You run the risk of damaging your credit rating by increasing account balances, so you also want to cut spending ruthlessly,” Weston says. “Too many people put off change thinking that things will get better any time soon and they find themselves in a much worse position in just a few months.”
Getting out of debt is good, and it can be tempting to keep investing as much as possible in your debt, even if it comes from an emergency fund. But you run the risk of going into debt again if you run out of money. If you pay with credit cards only to accumulate expenses later, you are not feeling well.
Take advantage of disaster plans
Many credit card companies have internal assistance programs that many are unaware of. Creditcards.com reports :
“They don’t advertise the software, they consider it property,” said Travis Plunkett, legislative director of the Consumer Federation of America.
“Most lenders will put the number right on their application,” says Shore. It won’t be obvious, but look for wording like, “If you expect problems paying your balance, please call this number.” The number can be used to call the Assistance Department or, more likely, Customer Service, which will check you.
And if you meet that customer service agent who tells you, “We don’t have a program to help those in need,” that’s a signal to hang up and call back later.
There are a number of other factors to keep in mind as you go down this path. For example, you should ask if they report your enrollment in a program for the poor and how they are credit bureaus. This may affect your score. But Creditcards.com says that in most cases, if they report it, negative links are removed from the report after the program ends.
Some programs can also freeze your card. Sometimes this freeze is temporary, but it can be permanent. And if you’re not claiming anything, it is at least worth trying to negotiate a better interest rate with a credit card company.
If you have student loan arrears, see if you qualify for a deferral or deferral. On a deferred basis, you pay the principal and interest later. Your interest usually stops accumulating during the “not paid” period. Patience works the same way, but during this period, interest continues to accumulate. We’ve written more about what to do if you can’t pay off your student loans , so be sure to read this post in its entirety.
If you are having trouble paying off your mortgage , there are several options:
- Change or refinance : Refinancing means that you take out a new loan to replace the current one. A loan modification, as the name suggests, changes your current loan. You might be able to lower your interest rate, but keep in mind that there are closing costs and fees associated with changing the loan that could make the whole process impractical, especially now.
- Abstinence or a new repayment plan : Like your student loan debt, you can cancel your mortgage or come up with a repayment plan with your lender. Both options involve limiting your payments for a certain period and then compensating them.
- Renting out your home : Obviously this is not an option for anyone (and you may incur the costs in the beginning), but if you are struggling, you may want to consider this option.
While these options are not realistic for every situation, they might be worth considering.
Consider government assistance programs
In addition to unemployment and working directly with your creditors and creditors, you may be eligible for debt relief programs designed for people in your particular situation. Here are some of them to look out for:
- Student Loan Repayment Programs : Depending on your profession, government or community activity, or even your city, you may qualify for a student loan forgiveness program. Detailed information about these programs on the marketplace .
- Income Based Payment (IBR): If you find a new job and it doesn’t pay that much, IBR can help you. This reduces your monthly loan payments based on your income. There are other pros and cons, which we’ll cover here .
- Deferral : See if you are eligible for a federal loan deferral on the government’s Federal Student Aid website. Then you can download the form you need. For private loans, you will need to check with your provider to see if you qualify.
- Affordable Home Modification Program : This program is available to homeowners in financial difficulties. You can see if you are eligible here .
In addition to debt-related programs, there is also government assistance for food , childcare and other basic living expenses.
At its best, job loss is frustrating when you are trying to pay off debt. This casts doubt on your plans, and you are forced to reconsider your goals. Worse, losing a job can lead to desperate and stressful decisions. This is definitely a situation that requires ingenuity and perseverance, but a few practical steps can help along the way.