How to Cope with Debt When You're Unemployed?
There's so much to worry about credit card bills, personal loans, private or federal student loans, and mortgages. Add to it the concern of unemployment, and things can get a lot ugly financially.
If you have multiple debts and have recently lost your source of income, it's okay to worry about tomorrow. You are in a pickle; there's no denying it, and no amount of “breath in and breathe out” can truly solve your issue.
However, a few strategies and information on what to do and what not to do in this situation can be of much help. Read ahead because that's what this article is about.
And while you read it, do take a few deep breaths. You'll get through it!
7 Tips to Cope With Debt When You're Unemployed
1. Create A New or Revise Your Old Monthly Budget
If you don't have a budget or have a budget, making a new one or revising the old one is paramount.
With a budget, you’ll know how much funds you have, your expenses, how much you can afford to put towards paying off debt, and the corners you can cut to save more.
To make budgeting easy, you can use the 50/30/20 rule, introducing your own modifications. For example, you can keep essential expenses, like housing, to 50% of your income, then allocate 10% for wants and use 40% for savings and debt pay-down.
Since you're focused on paying off your debt and dealing with a loss of income, you should lower the funds allocated to your "wants" to make extra debt payments. Making additional payments will help you eliminate debt faster and save on interest.
Related Article: Budgeting advice: How to budget your money in every sphere
2. Try the Snowball Method
After making a budget, list all your debts in the order of lowest to highest balance, including their interest rates, the minimum monthly payments, and the loan terms.
Once you make a list, deploy the snowball method.
This method involves gradually knocking off each debt, starting with the ones with the lowest balance.
You need to make minimum payments on all the debts and some extra payments towards the lowest debt, and after it gets paid off, use that extra amount for the next debt on the list.
This method won't strain your finances much, and you can continue to chip away at your debt.
3. Try Debt Consolidation
If managing multiple unsecured debts is difficult, you can try consolidating them by taking out a new low-interest loan. You can use a personal loan, home equity loan, or get a balance transfer credit card to consolidate your debts.
This process of debt repayment is much easier to manage.
However, you would require a fair to good credit score to make DIY debt consolidation worth it. If you don't have the score, you can enroll in a debt management plan offered by debt relief companies and credit counseling companies.
A DMP lets you make monthly payments that cover all of your unsecured debts that are included in the plan. It’s not a loan and won’t allow you to pay less than you owe, but a debt repayment plan can simplify the repayment process and shorten the time it takes you to get out of debt.
4. Leverage Unemployment Benefits
If you qualify for jobless benefits like food stamps and school lunch assistance, you can save more and pay off debt.
Don't worry; filing for such benefits won't affect your credit score, as your employment status doesn't influence your FICO score. So, as long as you maintain a positive payment history and avoid running up high credit card debt, your score will remain stable.
So, check your local listings for food banks and pantries at Feeding America. You can also find services like emergency rent assistance, health screenings, child care assistance, and housing resources through the Homeless Shelter Directory or Catholic Charities USA.
5. Seek Temporary Means of Income Generation
Paying off debt can be challenging without a steady flow of income, even with a good budget. After starting a debt repayment plan, you may end up too short to keep up with the strategy even while living frugally.
So, it's best to do whatever you can to generate cash flow.
You can look for temporary income-generating options like freelancing, becoming an online coach, offering in-person services like pet care, or even something as simple as leasing out garages or yard space for storage.
Your primary focus should be looking for full-time employment in your chosen career field. However, you can't ignore chances to keep your finances afloat while you find that next opportunity.
6. Time to Negotiate With Creditors and Collection Agencies
Even after trying all of the above steps, your debt may be to such an extent that the strategies prove ineffective - even making a minimum payment can be challenging. If that's the case, "don't wait until the tenth call or the overdue mail-in bill," says Faris Khatib, CEO, IdealTax.
Call your creditors and explain your situation. It’ll improve your chances of negotiating, revising, and settling on a favorable loan term.
You can reach out to your credit card companies and other lenders to ask to be placed on a hardship program or temporary deferment. They may not agree to it. But it's better to ask and take the chance of rejection than to not ask.
"Most of them will be far more understanding if the debtor phones to explain the situation," said Khatib.
"Many creditors, particularly credit card companies, may have this option available via their website, which may not require you to make any direct contact at all," said Max Schwartzapfel, CMO of Schwartzapfel Lawyers.
However, remember, this is only temporary; you'll want to pay down your debt once you're back on your feet.
You can also try debt relief options like debt settlement through negotiation and, as a last resort, bankruptcy.
If you aren't sure how to go about the negotiations or at what stage of your financial standing you should go for these debt relief options, it's best to talk to a credit counselor.
7. Don't Forget to Stay Healthy & Active
Even in normal circumstances, managing finances is a challenging endeavor. So, it's no wonder that losing a job threatens to tip whatever control you have over your financial life.
But no matter how stressful life gets, we owe it to ourselves to try and lead a healthy and happy life.
So, while making a budget, reviewing your expenses, sacrificing your eating out and movie nights, and looking for a job, remember to exercise and stay active as much as possible.
"Having to manage and pay off debt, especially when unemployed, can be a heavy burden on the mind and body, which can make any person sad, depressed, and develop terrible anxiety," says Chris Hunter, Director of Customer Relations, ServiceTitan.
What if You Fail to Make Your Loan Payments?
Sometimes, situations take such turns that even when you do everything in your power to make things right, nothing goes your way.
That can be the case when you're out of work and have debts to pay. You might be thinking - what may happen if you fail to fulfill your obligations?
It's important to know, so you can make an informed decision! This is what may happen if you don't make the payments -
Credit Card Bills
If you miss one payment towards your credit card debt, there's little to worry about.
Contact your credit card issuer, tell them why you missed your loan payment, and ask if they can waive the late fee. If it's your first time failing to make a payment, some credit card issuers may waive the late fees.
Try to make payment within 30 days of the due date, failing which you may risk taking a credit score hit or calls from debt collectors.
If you keep missing payments, your card issuer may close your credit card account.
Being in an unsecured debt, you don't have to worry about losing any property if you fail to make the payments. However, other aspects may bother you, like a negative hit on your credit score and the collection process.
In 30 days from the due date, you may get charged late fees and get a reminder from your lender. Your credit score may drop a few points. After 60 days, your creditor will contact you more frequently, charge more fees, and your credit score will continue to decline.
After 90 days, your credit score will take a massive hit, which will take a long time to recover.
And if you still don't make your payments after 120-180, your lender may charge off your debt and sell it to debt collectors. Sometimes, the lender may sue you to get a judgment against you and garnish your wages.
Mortgage loans are secured, which means your home is your loan's collateral. So, if you continue to fail to make timely payments without informing the lender and getting into a forbearance agreement, the lender may repossess the house.
Therefore, contact your lender as early as possible and work out a payment plan or other options.
Three Things You Should Absolutely Avoid If You Have Debt & You're Unemployed
Using Credit Card
Being unemployed, credit cards should be your last resort. You should focus on budgeting and generating new sources of income.
If you swipe your card, remember that whatever you purchase now must be paid off later, with interest. So, try to keep your balance to a minimum.
Dipping Into 401(k) to Pay Off Debt
Early withdrawal from your 401k may cost you in taxes and fees. You'll also lose your retirement savings, which may push you back a few more years from attaining your retirement goals.
Ignoring Collection Notice
Ignoring collection notices won't make your debt go away. So, it's essential to communicate and take action to address your debt.
Related Article: What you can envisage and do in different debt collection stages
Through communication, you'll be able to open the gates to successfully negotiating a payment plan. If you can’t do it on your own, you can seek help from a financial professional.
Ignoring the debt collector will only push them to use strict methods to collect your dues, like filing a lawsuit against you.
If you can't agree with your debt collector, you should contact an attorney, and they can provide you with legal advice about your situation.
Losing your job may feel like the end of the world, but it isn't. Your finances may be in disarray, but there are several ways to get out of debt, as mentioned above. So, get your chin up and do what's necessary.
Do your best to make the minimum payment on your monthly debts to avoid late fees, penalty APRs and credit score issues. Contact your credit card issuer to see if you're eligible for hardship programs to reduce your monthly payments or interest rate.
If you are considering using your credit cards or a loan to cover the income gap during a period of unemployment, remember that any purchases you make now must be paid off later, so don't take on more debt than you can handle.