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Dealing with credit card debt after being laid off

Will a debt consolidation program help? Maybe not

By

To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Steward Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets.
Ask Sally a question, or read her previous answers in the To Her Credit archive
Question for the CreditCards.com expert

Dear To Her Credit,
I am a single mom and was just unexpectedly laid off from my job. I have a lot of credit card debt and am afraid I soon won't be able to pay even the minimum amount. I don't want to ruin my credit for fear of not being hired someplace else. I also have a son in college, so most of my unemployment benefits will go to his tuition.

I have seen a lot of credit consolidation company advertisements, but I have also heard a lot of them charge a fee and then do not follow through with making payments to the creditors. Could you tell me what my options are? Thank you. -- Beth

Answer for the CreditCards.com expert

Dear Beth,
Don't make any drastic decisions just yet.

One problem with turning to credit consolidation the moment you get laid off is that yes, it will hurt your credit. That's if they do their job -- some "consolidation" companies, as you have heard, take the fee and do nothing.

The biggest problem with credit consolidation is that it doesn't solve your problems. It only takes a whack at one of the symptoms -- credit card debt. You need to look at your bigger financial picture.

Tracy Piercy, certified financial planner professional, founder and CEO of MoneyMinding.com, advises you, "Stop. Don't panic. Breathe."

Piercy recommends that you make a list of your monetary assets first. This includes cash on hand, retirement savings and even available credit. Then make a list of how much money you need and when on a weekly basis.

Resist the urge to create a big lump-sum amount of money you need. Piercy says, "That is a recipe for complete despair and certainly not helpful for making decisions about small steps."

Instead, create something accountants call a "cash flow forecast" to show how much money you will receive each week and how much money you will need to spend each week with a surplus or deficit. Go to your state's employment division website and determine how much you will receive in benefits. With this information, you'll know exactly how much money you need and when.

Armed with this information, you can start finding ways to make up the difference. Don't expect to fix it with one solution. You'll probably need to use at least a few of these options:

  • Your son may be able to find a work study program, if he's not in one already. A person can only study so many hours in a day and every hour he works will help.
  • Ask the college about payment plans, hardship rules and so on. The school's financial department can have a wealth of information you wouldn't otherwise know about.
  • If feasible, ask your son's father or even his grandparents for help.
  • Sell something, either to raise cash or to get out from under payments.
  • Concentrate on finding a job or self-employment income. Even in a bad economy, some people are finding work. It may as well be you.
  • Deal with debt. Piercy says, "See if there are any items that can be put on hold or renegotiated in the short term." Consolidation is only one of many strategies for debt. "I'm not sure I would put it first though, nor would I immediately jump to a credit settlement until all the other options have been evaluated!" she says. Other ways to deal with debt during unemployment include asking your bank for a hardship plan or negotiating the debt down on your own.
  • Consider drastic measures only after determining they are necessary. Drastic measures include moving in with relatives or renting out a room, expanding your job search geographically, selling all vehicles or taking a personal loan from your parents.

Piercy knows about financial crisis not only as a professional who has helped many people, but from first-hand, recent experience. She says, "The immediate panic and subsequent paralysis, depression, disappointment, despair and other equally negative emotions will tempt her to want to do anything to make the 'pain' go away.  It's OK to feel this way. It is normal and it is common."

You shouldn't feel all alone with this burden. Talk about it with your friends and family.  That's why it's so important that you stop and breathe before you jump into anything. Piercy finds many people don't want to run the numbers because they think they already know what they are. She says, "It must be in writing, and it must not be lumped into a couple big numbers." You'll get through this by breaking the problem into smaller time frames and smaller amounts of money, and then solving any shortfalls -- one manageable chunk at a time.

See related: 9 things you must know about debt consolidation, Laid off: which bills HAVE to be paid?, Card issuers don't make hardship programs easy

Meet CreditCards.com's reader Q&A experts
Vexed by a personal finance problem? CreditCards.com's Q&A experts answer questions from readers every weekday. Ask a question, or click on any expert to see their previous answers.
Gary Foreman, New Frugal You columnist Gary Foreman,
"New Frugal You"
Sally Herigstad, To Her Credit columnist Sally Herigstad,
"To Her Credit"
Cathleen McCarthy, Cashing In columnist Cathleen McCarthy,
"Cashing In"
Jane McNamara, Let's Talk Credit columnist Jane McNamara,
"Let's Talk Credit"
Elaine Pofeldt, Your Business Credit columnist Elaine Pofeldt,
"Your Business Credit"
Erica Sandberg, Opening Credits columnist Erica Sandberg,
"Opening Credits"

Published: December 7, 2012


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