How to Manage and Pay Off Debt When You're Unemployed
The following article is presented for informational purposes only.
Unemployment is stressful, especially when you’re dealing with debt. Whether you recently lost your job or have been unemployed for a few months, it’s important to make sure you can pay your bills each month—including your credit card bills and other unsecured loans.
But there’s probably one big question on your mind: How do I manage my debt?
There are several steps to take if you are dealing with debt and unemployment:
Apply for unemployment benefits
While you may earnestly want to keep up with your bills, if you don't have the necessary income, it's almost impossible to keep making payments on your debts. When your paychecks are paused, reduced, or cut off entirely, it’s important to consider your cash flow and how you can keep at least some money coming in.
Chris Tuck, a CFP® and wealth advisor at SJK Wealth Management, explains, “Claiming unemployment benefits is a great way to make sure that you are able to pay your current bills.”
The rules for unemployment vary by state, but you’ll want to file for unemployment as soon as possible. Even though the benefit amounts are based on a percentage of your previous salary, every dollar counts when you’re dealing with debt payments and other monthly expenses.
The first step is to file with your state and contact the State Unemployment Insurance agency.
Create temporary income if possible
It may be difficult to immediately replace your primary source of income. While you work on getting back into a fulltime position, you may want to consider temporary or part-time positions to help create at least some income.
A good place to start would be flexible side hustles with low start-up costs. If you have a car, you can sign up for a rideshare program or work part time as a delivery driver. Whatever you can do to safely bring in income will help increase your options and make managing your debts a little easier.
Ask about student loan forgiveness for the unemployed
If you have student loans and you're temporarily out of work, you may have options. Most federal student loans are eligible for some period of forbearance or deferment.
As soon as you know that your income will be reduced, connect with your loan servicer to discuss available options and begin the application process. While deferment may add additional interest costs and both options will increase the length of time spent repaying your loans, both options will provide immediate financial relief and prevent your loans from falling into delinquency.
Ask about credit card hardship or deferment programs
The more you can do to pause your debts during unemployment, the better. While the overall goal is to eventually pay everything off, once you start missing payments and becoming delinquent, paying off a debt gets harder and harder.
That's why you should reach out to your creditors before you start missing payments. They may be able to place you on a hardship program or a temporary deferment. They also may not be able to help at all. You won't know until you reach out for help, though, so check in with your creditors as soon as possible.
Understand what you can afford
Whether or not you can continue to make payments on your debts will depend largely on what your budget says. If you have adequate savings and at least some amount of income thanks to either unemployment benefits or a temporary position, you may be able to safely continue making your payments.
It's important that you set your priorities and spend accordingly. If you have no income and minimal savings, for instance, you probably can't afford to spend money on anything other than the essentials. Remember that the safety and wellbeing of you and your family comes first. That means shelter, food, and good health come well before credit card payments.
If you need help understanding what you can afford, consider speaking with a certified credit counselor. Counseling is free and designed to help you understand the best ways to reach your financial goals. If you're feeling overwhelmed, a confidential, judgment-free session with a credit counselor is a great first step.
Explore all of your options
The ideal option is usually to keep making payments in full every month until your debts are all gone. Unfortunately, when your income is compromised this option may be impossible. Depending on how long you're unemployed, you may find that a debt management plan or debt settlement make sense for your situation. Or it might be that bankruptcy makes sense for you.
“It’s not often that we advise bankruptcy, but the laws exist for a reason," says Tuck. It can be a difficult process to navigate and it will likely damage your credit deeply, but that doesn't mean it isn't right for you. "Sometimes it is the only viable option,” says Tuck.
Don’t lose hope
Debt and unemployment can be a difficult combination, especially when you’re confused about what steps to take. As you navigate the nuances of debt and unemployment, don’t lose hope. Even if it doesn’t feel like it in the moment, you’ll make it through.
If you’re ready to connect with a certified financial counselor, we're here to help!