Paying Your Debts While Unemployed

When you are unemployed, your life changes radically – professionally, psychologically and financially. Bills you paid regularly every month continue to come in, but your income has been severely compromised.

So while you are looking for ways to return to the workforce, you also have to adjust your day-to-day existence to reflect your new economic reality.

Create a Survival Budget

When you lose your job, the first thing to do is evaluate your finances and create a survival budget. Hopefully, you planned ahead for lean times and have some savings. Add to this any other sources of income, such as unemployment benefits, severance pay and any part-time employment you can acquire.

The guiding principle of a survival budget: take care of your family first, your creditors second.

Next comes a financial diet. The goal: eliminate all unnecessary bills. The point is to lower as many costs as you can so that you have resources to cover your real needs, like food and shelter.

For instance, if you have a cell phone and a land line, get rid of one or the other for the duration of your unemployment. You also may be able to trim your cell phone services.

Other tips: Reduce any services you can live without for a while – premium cable TV channels, lawn service, newspaper or magazine subscriptions. Cut down on eating out, and start saving grocery coupons.

Prioritize Your Debts

If your survival budget still leaves you in the red, you’re going to have to prioritize your debts. This is probably going to require some painful choices.

For example, you may have to surrender your car to keep your house. On the other hand, you may have to hold off on mortgage payments for several months. Sometimes there are no easy choices.

One way to conserve your available cash is to make only the minimum payments on your credit cards. You may have been able to pay off your bill in full while you were working, but during your time of unemployment, you may wind up having to roll over balances and pay interest charges. The idea is to keep your balance as low as possible and avoid using your cards as much as possible.

Negotiate With Your Creditors

If you can’t meet any of your financial obligations, you need to contact your creditors. Explain your employment situation, and see if you can negotiate reduced interest charges or a deferred payment schedule.

Some creditors may work with you and lower your payments. Some may not.

You may have some success with your mortgage holder. Banks and other mortgage lenders are under more pressure to agree to mortgage modification requests.

Talk to your loan servicer about lowering your interest and/or principal payments or granting a loan forbearance. That may enable you to make partial payments – or even none at all – for a set period of time. Your auto loan lender also may be willing to agree to a forbearance plan.

If you have a federally backed student loan, the government has many payment options available during times of economic duress, including unemployment. Contact your loan servicer for details or check with the U.S. Department of Education for guidelines.

You may be able to enroll in a debt management program if you still have sufficient income to make your monthly debt payments. Speak with a credit counselor to see if you qualify.

Explore Other Sources of Income

If you have other financial assets, consider tapping into them, but only if absolutely necessary. Withdrawing money from a retirement account like an IRA or 401(k) is not advisable, since there are penalties and tax consequences for doing so, but you may need to access those funds on a temporary basis. You can also consider borrowing from a life insurance policy that has a cash value.

If and when things get truly difficult – you are unemployed for longer than expected and your money is running out or you are confronted with a medical emergency – you may want to apply for public assistance.

A number of public assistance programs are available. They include:

• Church and charity groups
• The federal government has more than 1,000 benefits programs available to in their times of need.
• The U.S. Department of Health and Human Services (HHS), which has more than 300 grant programs that can help with hospital bills and medical costs
• The Low Income Home Energy Assistance Program (LIHEAP), which can help with heating and utility costs.
• SNAP (Supplemental Nutrition Assistance Program, formerly food stamps), which helps struggling families to put food on the table.

Additional Options when Money Is Tight

Even in the best of economic times, debt can be overwhelming. It is that much more troubling when you are unemployed. One option to consider is a professionally managed debt settlement program — a plan in which a reputable company negotiates with your creditors on your behalf to eliminate a percentage of your outstanding debt. By agreeing to pay a portion of it, it is possible to close accounts permanently for less than you owe.

If your debts are overwhelming and your job prospects dim, you may need to consider personal bankruptcy as a last resort. Depending upon the type of bankruptcy you declare, you can either retire most of your debts entirely, or agree to a multi-year repayment program that keeps your creditors at bay while you pay off your obligations in a court-sanctioned and orderly manner.

Remember: bankruptcy is a complex procedure requiring the assistance of competent legal counsel. It will also damage your credit rating for several years.

However, it is a legal option available to you and needs to be contemplated if warranted by dire circumstance like prolonged unemployment.