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How to Deal with Debt When You're Out of Work
You've found yourself without a job, not knowing how long you may be unemployed. What can you do now to manage your finances in the short-term and long-term? Here's a six-step plan:
Step One: Prioritize your debts
Step Two: Talk with your creditors
Step Three: Pay what you owe (at least the minimum payment amount) on time
Step Four: Cut back on your expenses
Step Five: If you have to borrow, find the least expensive sources of money first
Step Six: Find ways to generate income
Step One: Prioritize your debts
Financial experts say that it's key to pay in full your basic living expenses (housing, car, food, utilities, health insurance, etc.) while you're unemployed. The number one priority should be paying your secured debt, such as your mortgage and car loans, on time, since these are things a lender can repossess if you fail to meet your obligations.
Step Two: Talk with your creditors
If you think you won't be able to make certain payments, talk to your creditors. Most will work with you to create a manageable repayment plan. Some lenders may offer a skipped payment or reduced monthly payment plan. Keep in mind that you will owe the difference eventually, so make sure the terms are ones you can afford later. Don't wait until your accounts have been turned over to a debt collector. At that point, your creditors have given up on you. The federal Fair Debt Collection Practices Act requires debt collectors to treat you fairly by prohibiting certain methods of debt collection. To learn more, visit the FTC's consumer information web site on "Dealing with Debt" or see the related links to this article.
Step Three: Pay what you owe (at least the minimum payment amount) on time
To keep your credit record in good standing, be sure to pay what you owe on time every month. Late payments and non-payments may impact your credit rating and your ability to get credit in the future. For more about credit ratings, please see the related links to this article.
While some creditors will renegotiate your payment schedule with you, others (such as credit card companies) may not. Pay at least the minimum due on every statement, and make sure the payments are made on time. Consider consolidating multiple credit card balances onto a low interest rate card.
Step Four: Cut back on your expenses
Most importantly, look for ways to reduce your spending during this time. If your spouse is working, find out what insurance benefits you qualify for through his/her plan. You're likely to pay far less for this health insurance over continuing the policy from your old job.
Let your family know that this is a time to cut costs wherever possible.
Step Five: If you have to borrow money, find the least expensive sources of money first
If you need to borrow money to pay your bills, find the cheapest sources for loans. You don't want to go further into credit card debt (often an expensive choice) during this time.
If you are a homeowner, a home-equity line of credit may be a low-cost option for you. Taking the cash value of a life insurance policy is another option. In both cases, the rates are generally lower than the interest you're paying on credit card debt. When you take cash out of a life insurance policy, it doesn't have to be repaid. Instead, it reduces the death benefit paid to your beneficiaries.
Friends and family may also be able to assist you during this time. If you do borrow from them, be sure to formalize your agreement in writing to avoid any misunderstandings or hard feelings.
Be wary about cashing out a 401(k) - which is protected from creditors - in order to cover your expenses while unemployed unless it's the absolute last resort. You don't want to give up your retirement nest egg and at the same time be hit with 20 percent in taxes and a 10 percent penalty on your withdrawal if you're under 59-1/2 years old.
Step Six: Find ways to generate income
Consider ways to generate income, even if it isn't a return to a full-time job. Part-time work may be just the ticket to avoid tapping into your credit card for cash advances. Some often overlooked part-time jobs include: tutor, clean house, teach music lessons, provide child care, house or pet-sit, write freelance, etc.
Do you have personal property of value? Could you sell your second car? Find valuables around the house to sell on eBay? Have a garage sale?
Keep in mind that unemployment is temporary. The efforts you make now to manage your finances will help you today and long after you've returned to work.