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Columns: The Debt Adviser
Steve Bucci   Expert: Steve Bucci
The Debt Adviser
Dealing with big debt and no job
The Debt Adviser

How to deal financially with a job loss

Dear Debt Adviser,
I just got laid off from my job. I never missed or have been late with a payment in about 13 years. I have several credit cards and owe a total of about $24,000. I want to be responsible for what I owe. I don't want to declare bankruptcy. Also, I can make the minimum payments on some of the cards and would want to keep at least one for emergency purposes only. Is it possible to get them to lower my minimum payments until I get back on my feet without "freezing" all my credit? Thanks.
-- Dan

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Dear Dan,
You are not alone. I personally went through this meshugass* four times. By the second time, I figured out a few things. By the fourth, I was getting pretty good at making the best out of a really miserable situation.

I'm going to assume that if you stopped using cash for living expenses, you could make your minimum payments on your credit cards. Based on that assumption, your goal during this difficult financial time is to minimize expenses and protect your cash by using credit. 

Yes, this is unexpected advice from the Debt Adviser, but I recommend you use your credit cards to tide you over, but only in the short term, and only for essentials -- and that includes living expenses.

This is almost the opposite advice that working people are given. But you aren't working, hence the difference. Using credit will protect your irreplaceable cash and allow you to continue making minimum payments for a longer period, thus protecting your credit rating. Unless you have a big stash of the green stuff somewhere, it is important not to exhaust your supply. If you run out, you may have to use cash advances, which are hugely expensive and will increase your risk profile.

Remember, this is a short-term solution while you are looking for a job. Once you are back on your feet, get those credit cards paid off as fast as you can!

Look at your monthly expenses and cut them to the bare bones. You may have already done this, but take another look and make sure you haven't overlooked anything. Then, get a copy of your credit report and make sure it looks as good as it can. Dispute any out-of-date or inaccurate items. A positive credit report is an important job hunting tool. Many employers get a copy of your credit report as a part of their pre-hiring background check.  It would be best for you if you can keep your report looking good and stable. Often, employers will not ask why your credit report is terrible; they will just move on to the next candidate. 

Often I advise communicating with creditors, but don't be too quick about it. Your job loss situation is none of their business unless you can't make payments. Call or write them only when you know for sure that you will be unable to make a payment.  If you are unable to make all your payments, ask your creditors for a hardship program that will allow you to make lower payments. Hardship programs typically last only three to six months.

If you are still unable to make the payments required under the hardship program, or the creditors will not enroll you in one, it's time to let them know you can't pay until you secure another job. Consider visiting with a reputable credit counseling agency for help at this point. If you prefer to do it on your own, communicate in writing with your creditors and let them know you are unable to pay the monthly amount required in the card agreement, but that you intend to resume paying as agreed as soon as your situation is resolved.

It is likely that most people in the working world will experience a layoff or other involuntary job change sooner or later.

Here are some other things I've learned that may help others in this situation.

Dealing financially with job loss

  • Build up savings for the next time. Six months of living expenses is still a good number to shoot for.
  • Don't carry large balances on your credit cards and never for more than 90 days.   
  • Bankruptcy should be a last resort.
  • Consider visiting with a reputable credit counseling agency.
  • Don't let it drive you crazy. This too shall pass!

Good luck!

* Madness or insanity. (Source: Michael Fein, Yiddishkeit)'s corrections policy-- Posted: May 18, 2007
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