What To Do When You Are Unemployed with Credit Card Debt: 3-Steps

A flood of panicky questions pours into your brain when you lose your job. Somewhere between “How will I feed my family?” and “Oh my God, will I have to give up HBO?” comes this pivotal one:

“How do I handle my credit card debt when I’m unemployed?”

Having any kind of debt is a worry, but debt with a high interest rate can really ruin your day as well as your credit score.

Here’s 3 Step guide on how to survive unemployment with credit card debt.

1. Enroll in Creditor Hardship Programs

If you owe money, check what options might be available for reducing minimum credit card payments while you’re unemployed. Though you might be tempted to hide your employment status from creditors, they are often willing to work with you to avoid default. Many lenders maintain credit-card-hardship programs that lower monthly payments or delay payments entirely for a certain amount of time.

Be aware that entering a hardship agreement probably will be entered in your credit history and likely will impact your credit score. Seeking this kind of relief should be considered a last resort, but if you can’t make minimum payments, it is worth pursuing. Remember, lenders don’t advertise hardship programs. Gather Information through online research, which you should do before you contact the lender.

Mortgage lenders and auto lenders often have hardship programs as well. If money is tight, see what options through all of your lenders.

Finally, contact your student loan servicer to see if you qualify for a temporary suspension in payments.

2. 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.

Category one expenses, those you cannot afford to cut, are mortgage/rent, utilities and food.

Mortgage/Rent

Mortgage or rent will need to be paid. If you have the ability to take in a roommate, however, this could defray some of your housing cost.

Utilities

Reduce energy costs. If it’s summer, raise the thermostat on the AC. In winter, wear sweaters and lower the temperature.

Food

Food is an area where most people, when pressed, can find tremendous savings. Eating out? Forget about it. Americans spend almost 40 percent 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.

Category two expenses can be cut, but they are still very important: health insurance your car payment.

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 Payment

You’re going to need wheels to get to job interviews, but you might be able to reduce your car payment 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.

Category three expenses can be cut dramatically. Here’s where you are going to find the most savings.

Phone and Cable

You will 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 the 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.  Get rid of you land-line phone if you still have one and rely on your cellphone.

The same goes for cable TV. Consider cutting the cord all together and watch streaming videos online instead. You might discover removing TV from your life will mean more time for what matters — finding work. If life without cable TV seems unbearable, drop premium channels and survive without “Game of Thrones.” Many people have found cutting the cable cord completely is a liberating (and wallet building) experience. Save money on internet by applying for a low-income subsidy.

Services, Subscriptions and Other Expenses

Suspend other services and do the work yourself. You have extra time when you’re out of work, so mow that lawn yourself. If you have a pool, maintain it on your own. And do without the house cleaning service, if you have one. Trim subscriptions. Suspend the newspaper if you get one.

3. Apply for Unemployment Benefits and Other Government Assistance

If you qualify for jobless benefits, apply for them and then focus on finding a new gig.

Applying for government assistance, including the Supplemental Nutrition Assistance Program (SNAP) and school lunch assistance is another option. 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.  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.

Credit Card and Unemployment Frequently Asked Questions

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.

How Long Will I Be Unemployed?

Each situation is different, of course, but chances are you will be out of a job at least five weeks, maybe longer.

The August 2017 Bureau of Labor Statistics unemployment duration report found that 30.9% of people find a job in fewer than five weeks, 29.3% find a job in five to 14 weeks, 13.9% find work in 15-26 weeks.

Anything longer than that is considered long-term unemployment. To survive that long, many have become experts at living with less.

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 with the expectation that “I’ll catch up 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? Take the credit cards out of your wallet. Avoid taking cash advances or signing up for financing plans during your time out of 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. Retirement plans like 401(k)s and IRAs are exempt from bankruptcy and impose high penalties for withdrawal. You will have to pay taxes on the money you get and a 10% early-withdrawal penalty if you’re under 55. (The age is usually 59 years and 6 months, but it’s reduced to 55 if you’re laid off).

You should avoid tapping into a retirement plan to handle unemployment expenses.

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 good 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. Call a nonprofit credit counselor for an assessment of your financial situation and a personalized debt relief recommendation, which may be to file for bankruptcy.

What to Do If I’m a Member of the Long-term Unemployed?

If you’ve been unemployed for more than six months, your jobless benefits have run out and you’re having difficulty paying for the essentials, you should not make any payments toward your credit cards. You simply cannot afford to. You will have to catch up later when you have reliable income or pursue bankruptcy.

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 later, once you’ve established employment and you the income firepower to direct at 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 can’t do anything to you if you don’t pay the minimum payment. They can’t take your house or car away. They can’t put a lien on your unemployment check (government income is exempt from liens). They can’t put a lien on your wages, because you don’t have any. 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.

Bad Credit & Unemployment: A Vicious Circle

Job applicants have to painstakingly pore over their resumes and cover letters because studies show that hiring managers have little tolerance for any mistakes. And now, there’s something else for an applicant to worry about — his or her credit profile.

At the same time the lagging economy is adversely affecting people’s personal finances — and thus their credit histories — employers are scrutinizing the way people pay their bills as part of their screening process.

The U.S. Equal Employment Opportunity Commission is so concerned about this trend that it held a hearing recently to examine the potential impact on workers.

The Fair Credit Reporting Act allows employers to pull credit reports on current employees and job applicants as long as certain disclosures are made. An employer has to get written authorization from the individual to view a report, and then must give the worker or applicant a copy along with a written description of the person’s rights before taking any adverse action based on what is in the document.

The Society for Human Resource Management says job applicants shouldn’t worry too much about credit checks. Although about 60 percent of organizations use credit checks when selecting employees for some jobs, only 13 percent of organizations conduct credit checks on all job candidates.

“Credit check results are one important component of the hiring decision but are not typically the overriding factor in the consideration of a job candidate,” Christine Walters, a human resource professional and lawyer, told the EEOC.

 


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