How to Manage Debt If You're Unemployed
by: Remie Longbrake | published: June 15, 2020
If you are unemployed, controlling and managing debt is frustrating and stressful. There is lot of uncertainty, but also responsibility. Circumstances are difficult in these times.
Ultimately, you would not want to miss a payment if you can help it. Communication is paramount to staying out of financial trouble. You want to try to stay ahead of debts and keep creditors at bay.
Managing these debts while you are unemployed adds much stress to an already difficult situation. Use the tips below to help prepare yourself in the best ways to manage debt with more certainty.
Use a budget
If you do not already have a budget in place, now is the time to start. It is good practice to understand where money is going. A budget can help you spend while understanding your monthly obligations. There’s a number of free resources for budgeting and numerous budgeting tips available online. We have a free printable budget available and additional resources dedicated to these topics on our site.
When using a budget, what you want to do is list all the expenses by category, such as rent or mortgage, utilities, groceries, meals out and personal care. Include all your regular fixed expenses as well as expenses that vary month to month. Also, take an estimate of any income coming in, including unemployment compensation.
You will want to determine how much you can budget towards each expense. Now is the time to cut back what you can and prioritize expenses. Mortgage, utilities, and car payments should be among the top of these priorities.
Budgeting is a good habit to start, and even once the circumstances improve you can evaluate your budget and make changes accordingly.
Call your creditors
If you are going to have issues paying bills, you will want to notify your creditors as soon as possible. You don’t want to just not pay a bill as that will damage your relationship with the creditor and your credit.
Call and see what your options may be. Explain to the creditor that you are unemployed. They may be able to work something out. Before you commit to their terms however, you will need to know how much you can afford. Therefore, it is important to have your budget in place.
Depending on the company, they may agree to reduce your payments, at least temporarily. They may also allow a more long term reduction in payments, deferment or reduce the interest rate. If you have already fallen behind and have late fees already in place, call and see if any of those fees can be waived.
It is important to be honest and share that you're experiencing a financial setback. If the creditor isn't willing to work with you, be sure to ask other lenders for assistance: Last thing you want is to get in trouble financially. Prioritize the mortgage, and vehicle debts first. Credit card companies may not be as forgiving; however it is important to at least try and to see what can be done.
For student loans, there is a good chance those can be set to forbearance for the time being. Private and consolidated loans may prove more difficult, however Federally backed loans should be easier to hold off on. Of course, as with any debt call them all and see what the option are before making any decisions that will impact future borrowing power and/or credit scores.
Avoid adding to debts
In a financial situation where you are unemployed, it may be tempting to extend your debt load by using credit cards. This is a slippery slope, however. If you cannot pay off the balance before end of the month, the fees incurred can be extreme.
Using credit cards would have to be one of the riskiest ways to attempt to pay debts. It is so important to have that emergency fund in place for these exact moments. You would certainly want to utilize your cash reserves before deciding to use the cards. If you have any cash available, use those reserves to pay bills instead of adding to credit card debt.
There may be other options if emergency funds are depleted, however you want to be careful tapping into equity in the home or using your 401(k) or individual retirement account: Withdrawing money here means you'll lose out on investment gains that could make a significant difference to the future balance.
If you don't have an emergency fund and can't afford to pay for the mortgage, rent, and other priority expenses, you might won’t to consider taking out a personal loan. Although a good credit score will be needed, you may qualify for a decent rate. Credit unions are generally the better way to go here. They tend to offer the best rates. If you already have your mortgage or car loan through the establishment it would be easier to qualify. If you do have another loan, you want to be careful the bank wants to use your car or home to this new loan as collateral. Even without specifically listing collatoral, such as for a credit card or unsecured loan, keep in mind those vehicles and your home will be the collateral regardless if those accounts are already at that bank.
As with any loan, only take out what you think you will need to cover your expenses. Again, use your budget to help determine this amount.
Limit your extras
Now is the time to watch your excess expenses. Gym memberships, subscriptions, memberships, etc. Also, consider limiting how much you eat out, such as takeout and shopping for items that are not necessarily required. Keep those extras in check.
Keep making your payments
Always do your best to make payments on time and pay at least the minimums due. If you are unable to meet your obligations make sure to let your creditors know. You want to attempt to keep your payments up to date. If a creditor will not work with you, at least make your payments on time. It is usually more severe to not pay on time then to fail to make the minimum amount.
Optimize your options
By understanding your budget, speaking to creditors, and keeping debts in check, you will more easily survive the challenges being faced. Of course, the challenges are real, however you must do your best to stay on top of things and not get over stressed or in trouble financially.
See these times as a temporary setback. Use your resources and be proactive as much as possible. Seek assistance from others when needed. Use unemployment benefits when possible. That process takes time and is unlikely to cover all expenses in a given month, however.
Also, do not be afraid to reach out to family and friends when possible. If the situation is dire, use the local food pantry. For health care needs, your doctor may not be inclined to assist for your primary care if unable to pay co pay and required deductibles. If that is the case contact the community health centers for health care. They may accept you based on current circumstances, even if in normal times you would not meet the income requirements.
Be sure to ask local churches as they may have resources in place as well for food, shelter, health care, and financial support.
If you are overwhelmed with the situation, reach out to those who can help. We are one of those places that are happy to help you understand options and help make continued progress. Do your best to stay positive and keep proactive. These times are tough; however, they are temporary nonetheless.
Written by: Remie Longbrake