Businesswoman sitting on stairs with box of belongings after being laid off

If you were one of the millions of workers who lost a job with the arrival of the Covid-19 pandemic, you understand the shock. In just weeks, the disease kneecapped a thriving U.S. economy, abruptly ending paychecks that workers counted on to pay bills. Those with sizable credit cards debts were among the hardest hit as the ability to pay down balances vanished for many of the 40 million who field for unemployment.

If you’re suddenly unemployed with a fat folder of credit card debt, you need to immediately assess the damage and forge a plan. Failing to make the right moves can lead to default and a badly damaged credit score, but the good news is if you make the right moves, you can avoid the worst financial damage.

A legacy of big balances when you’re unemployed can feel overwhelming. Interest rates on credit card debt are typically high and a failure to make minimum monthly payments can quickly lead to default and even bigger financial problems.

If you don’t have money in your savings accounts to cover required payments, you need to take action immediately. That means cutting discretionary spending and diverting whatever money you can to paying your bills.

At the same time, you should explain your situation to your credit card issuers. Card companies are often ready to stretch out payment schedules without damaging your credit score. They also might agree to reduce fees or extend payment due dates. During the Covid-19 pandemic, some created forbearance programs that reduce interest rates, eliminate fees and stretch out monthly payments. Remember, your creditors understand financial problems. If they believe you can repay your debts with easier terms, they are often ready to work with you.

Enroll in Creditor Hardship Programs

Credit card hardship programs are another option. Though credit card issuers don’t advertise these, some are willing to lower your required minimum monthly payment if they think it will stop you from defaulting.

Be aware that entering a hardship agreement probably will be entered in your credit history and likely will lower your credit score. Seeking this kind of relief is typically a last resort, but worth considering if you can’t afford minimum payment.

Mortgage lenders and auto lenders often have hardship programs as well. You can sometimes learn about which lenders offer hardship programs through online research.

Finally, if you have a student loan, contact the servicer to see if you can temporarily suspend payments.

Make a Budget and Prioritize Expenses

You’re not the first person who’s been in this fix. The ones who’ve weathered it the best start by making a budget that reflects their new financial situation. On the expense side, it’s time to cut back spending. That means make decisions on what you need and what you don’t.

When you develop or revise your budget, divide expenses into mandatory and discretionary categories. Mandatory expenses — which include housing, food, utility payments – can’t be avoided. Many discretionary ones, like dining out and attending movies, concerts or sporting events, can and should be cut. Other discretionary expenses, including telecommunications connections, car payments and health insurance, can either be eliminated temporarily or cutback.

Mortgage/Rent

Mortgage or rent needs to be paid. If you can take in a roommate, however, you could save money on rent or offset your housing costs. You could negotiate with your landlord, offering to do maintenance work or find tenants to fill empty units in exchange for reduced rent. If you’re a renter, you might consider moving to a cheaper place or even moving in with parents or other relatives during you time out of work. If you own your home, the problem is tougher since mortgage lenders typically want timely payments. During a emergency like the Covid-19 pandemic, government programs might allow you to miss rent or mortgage payments temporarily without facing eviction or foreclosure.

Utilities

Reduce energy consumption to save on utilities. If it’s summer, raise the thermostat on the AC. In winter, wear sweaters and lower the temperature. You can also turn down the thermostat on your water heater and take shorter showers, which will cut both electric and water bills. For information on energy saving, contact your utilities or a government agency that offers conservation tips.

Food

Food is an area where most people, when pressed, can find tremendous savings. Eating out? Forget about it. Americans spend almost 40% of their food budget eating out. Stay home. Wipe off the stove top and clean the microwave, because you’ll be using them more than you have for a long while.

Another way to save money on food is to check if you qualify for the Supplemental Nutrition Assistance Program, known informally as food stamps. SNAP can significantly lower your grocery bills, though restrictions apply to what you can buy.

Health Insurance

Make sure you consider health insurance. If your former employer offers an affordable extension of your work plan, consider that. The federal Consolidated Omnibus Budget Reconciliation Act (COBRA) allows the newly unemployed to continue their group coverage, but usually without the company subsidy that made the insurance affordable. If COBRA coverage costs more than you can pay, consider looking for a plan through HealthCare.gov.

Car Payments

You’re going to need wheels to get to job interviews, but you might be able to save money on auto costs by enrolling in your auto lender’s temporary hardship program. If your car payment is unaffordable, you can surrender it and look for an inexpensive used car.

Phone and Cable

You need a cellphone for job searches and morale-boosting talks with family and friends, but you might not need a plan with unlimited data and international calling. See if you can cut back options. Even if you are locked into a contract, you might qualify for a hardship plan with your carrier that suspends expensive options while you are unemployed.  Also, ditch your land-line phone if you still have one.

The same goes for cable TV. Consider cutting the cord and watching streaming videos instead. You might discover removing TV from your life will mean more time for what matters, like finding work. If life without cable seems unbearable, drop the premium channels. Save money on internet by applying for a low-income subsidy.

Services, Subscriptions and Other Expenses

Suspend household services and do the work yourself. You have extra time when you’re out of work, so mow that lawn and clean the house yourself. If you have a pool, learn how to maintain it. Trim subscriptions. Suspend the newspaper and ax the premium subscription to Spotify or Pandora until you have an income again.

Apply for Unemployment Benefits and Other Government Assistance

If you qualify for jobless benefits, apply for them.

Food stamps and school lunch assistance can also save money that you’ll need for other critical expenses. Though many of us resist seeking government help, if you have a genuine need, remember that the programs were designed to help people like you navigate rough patches.

Avoid taking cash advances or signing up for financing plans during your time out of work and avoid using your credit cards, especially if you have unpaid credit card debt.

Credit Card and Unemployment Frequently Asked Questions

Credit card debt is a millstone that can drag you down during a stint of unemployment. It is important to either eliminate it or create a plan to manage it while you are living on greatly reduced income. This won’t be easy to do, especially if you had a hard time managing debt while you were employed. If you need help creating a plan, consider seeking assistance from a nonprofit credit counselor like InCharge.org.

Nonprofit credit counselors can offer useful advice for paying down debt with reduced income, often at little or no cost to you. Counselors can also coach you on how to explain your situation to creditors and inquire about relief or hardship programs that might make paying off debt easier. If you discover that you can’t resolve your debt problems yourself, the credit counselor might suggest a debt management plan that negotiates with creditors, consolidates debts and supervises payments.

Here are some questions that unemployed workers often ask:

Should I Pay My Credit Cards When I’m Unemployed?

Yes, if you can afford to. If you can afford the minimum payments (as well as food, shelter and utilities), then you should absolutely pay your credit cards during unemployment.

Should I Use My Credit Cards While I’m Unemployed?

Be very careful about using your credit cards. It’s tempting to take on credit card debt expecting to pay it off later. Problem is, you don’t know how long “later” is going to take. Taking on new cards or not paying off your balance at the end of the month can be extremely costly if you don’t get a new job quickly. Best suggestion? Stop using credit cards and avoid taking cash advances or signing up for financing plans until you find work. Also, avoid using your credit cards as cash machines. While you might find such options tempting, they often come with very high interest rates and can create more problems than they solve.

Should I Withdraw Money from My 401(k) While I’m Unemployed?

No. If you pull money out of tax-deferred retirement plans like 401(k)s and traditional IRAs, you could face sizable tax penalties for early withdrawals. Worse still, you will be depleting accounts intended to fund your retirement, opening the door to future financial woes.

The 2020 CARES Act, a financial relief measure tied to Covid-19 pandemic, eliminated the penalties on early withdrawals of as much as $100,000 made before December 31, 2020. The caveat is that the distribution must be related to a coronavirus hardship to qualify.

Again, it’s important to consider the consequences and try to avoid early retirement-account withdrawals.

Should I Take out a Home Equity Loan to Pay My Credit Cards?

A low-interest home equity loan or line of credit may be the right solution for you but be careful. If you find yourself heading toward bankruptcy, your primary residence may be exempt, in which case you are putting your home at risk needlessly. It is difficult to qualify for a home equity loan or line of credit, however, without reliable income. You’ll also need a good credit score to qualify for the best interest rates.

Should I Consider Bankruptcy If I Can’t Pay My Credit Card Bills?

If your unemployment persists and you are not able to pay your bills, bankruptcy may be a viable option for you. Bankruptcy is a serious step that can cause long-term damage to your credit. Before filing a petition for bankruptcy protection under Chapters 7 or 13, make sure you understand the consequences. Bankruptcy might relieve your immediate financial pain and might be the only viable option, but approach it cautiously.

Can Credit Counseling Help?

Seeing a nonprofit credit-counseling firm like InCharge should prove very helpful in creating a plan to deal with disrupted finances. Credit counseling can help you design an emergency budget that helps you allocate your money to cover expenses. You will need to rank priorities and pay essential expenses first. If you had credit card debt before you lost your job, a counselor might recommend a debt management plan that consolidates debt into a single monthly payment. The plan will allow you to pay off debt in three to five years.

What about Debt Settlement?

Consider debt settlement only if you have enough money to settle your debt (usually about 50% of the debt). Don’t allocate money towards a debt-settlement stockpile if you anticipate having problems paying for the basics: food, shelter and utilities. Debt settlement might be a path for you after you’ve found a new job and have the income to tackle your debt.

What Can My Creditors Do to Me If I Don’t Pay Them?

Most people want to pay their bills on time and take pride in doing so. The thought of not paying can cause panic. But here’s the good news: Credit card companies are limited in what they can do if you default on your debt. They can’t take your house or car away. They can’t garnish your unemployment check (government income is exempt from liens). They can’t put a lien on your wages, because you don’t have any.

That said, creditors aren’t toothless. They can, and often do, sue those who default. If you are sued for credit card debt, immediately review the filing to make sure it’s accurate. Often the plaintiff isn’t the credit card company but another business that bought your debt and will try various tactics, including a lawsuit to recoup at least part of what you owe. If you determine that the lawsuit is accurate, you need to defend yourself, which makes you will likely need a lawyer.

If you get calls from your creditors, calmly explain that you’ve lost your job and you’ll catch up once you’re re-employed. Sometimes you can stall and reach a settlement agreement before a suit is filed.

Bad Credit & Unemployment

Past credit problems could hurt your chances of landing a job.

The federal Fair Credit Reporting Act allows employers to pull credit reports on their employees and job applicants as long as they get written authorization from the person being checked.

Although more than 70% of organizations check some job applicants’ credit, but only 29%of applications to those companies are ever given credit reviews. They have a variety of reasons for doing this, including an assessment of your competence handling money, your ability to make sound judgments and even the likelihood you might commit a financial crime.

If you are concerned about a potential employer’s request to review you credit report, you should consider contacting a nonprofit credit counselor for advice.


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