Laid off and in debt: 5 steps to take now

Unemployed and owing is a bad combo. You need a credit plan. Now.

Losing your job is one of life's most stressful situations, and credit card debt adds to the strain. It is possible to survive unemployment with your credit score intact -- and without late payments, soaring interest rates and scads of fees -- but it takes a plan.Laid off and in debt: 5 steps to take now

Here's a list of five steps to take:

1) Gather your records, a calculator and crunch some numbers.
Before you take any action, you need to know where you stand. "One of the main mistakes consumers make is we have no idea where all of our money goes," says Raymond Lucia, financial planner and host of the radio talk show "The Ray Lucia Show."

So gather your bank statements, unemployment benefits information and any other income and look at where to cut expenses. When 41-year-old IT consultant Jim Roberts, who lives in Bartlesville, Okla., lost his job, he and his wife had more than $12,000 in credit card debt on at least 20 cards, including store cards. To make ends meet, the couple cut satellite TV, started using coupons and transferred some credit card debt to cards with an introductory 0 percent interest rate. "That really helped a lot," says Roberts.

2) Prioritize basics -- but not luxuries -- over debt.
It's important to get some perspective -- don't prioritize your credit score above your needs. Pay your mortgage and utility bills and buy food and medicine, then look at making credit card payments, recommends Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling. "People often pay the creditors first because they're feeling pressure -- nightly phone calls, letters in the mailbox. If your creditor is happy but your electricity has been cut off, you've paid backward."

On the other hand, if you're late with payments, expect your credit card companies to do what Roberts' did. He paid late and his interest rates jumped -- to 34.99 percent on one card.

3) Make it your job to find a new job.
The best way to prevent falling behind on your credit card payments or being unable to make them at all is to find a new job -- fast. "Your number one priority should be to replace your income -- unemployment isn't enough," says Steve Rhode of A study released in January 2009 by Families USA showed that in 41 states, paying premiums to keep health insurance through a former employer's plan using COBRA uses up more than three-quarters of the average monthly unemployment benefit, which ranges from $800 to more than $1,500, depending on the state. Rhode recommends spending at least four or five hours a day looking for leads, sending out resumes and going to interviews. It typically takes about a month of job searching to replace each $10,000 of a lost salary -- five months to find a $50,000-a-year job, Cunningham says.

4) In the meantime, try to avoid racking up more debt.
If you don't have an emergency savings fund, it's tempting to whip out credit cards to buy groceries. But that behavior just puts you deeper in debt and can hurt your credit score. "It makes a creditor really nervous if you go over 30 percent of your credit limit," Cunningham says.

Instead, she recommends selling assets -- an extra car, a gun collection or jewelry, for example. Or Lucia suggests borrowing money from a whole life insurance policy, if you have one. "A lot of people have old whole life insurance policies that mom and dad gave them when they graduated, and maybe there's cash value in them," Lucia says. "It can help you get through a very tight cash flow situation."

5) Pay the minimum. If you can't, negotiate or seek help.
If you just can't make minimum payments, you have several options:

  • A credit card company's in-house forbearance program
    This might work best if you just have one credit card and want to negotiate on interest rate and fees. "We offer various tools to help consumers if they are going through financial difficulty," says Betty Riess, spokeswoman for Bank of America. "We look at each customer's individual situation." Forbearance is a temporary respite. Cunningham says in-house programs usually last only three to six months.
  • A debt management program
    Entering a debt management program through a reputable, nonprofit credit counseling agency might make sense if you have multiple credit cards or don't want to negotiate on your own. "A certified credit counselor can work out a new budget for you and negotiate with creditors to lower your monthly payment and interest rates and get late fees and over-limit fees stopped," Cunningham says. You make a single monthly payment to the agency, which pays the creditors.
  • Consolidate
    Some experts say it's no use seeking a loan to consolidate your credit card debt if you're unemployed. However, Susan Tiffany, director of adult education for the Credit Union National Association, says that's not necessarily true at a credit union. "Because you're a member and your credit union knows you, you might be in a better position to get a loan," Tiffany says. "Credit unions across the country are really bending over backward to help people who've been laid off right now."
  • Debt settlement
    A much more drastic option for consumers who are seriously delinquent, according to Cunningham, is a debt settlement, in which you negotiate with creditors to settle the debt for less than the amount owed. "It will stay on your credit report -- 'paid by settlement,' " Cunningham says, and you'll owe federal income taxes on the forgiven amount. Be careful about hooking up with a so-called debt settlement company, Cunningham warns: "They can have very high fees -- one model is 15 percent of the debt -- that can cost you thousands of dollars."
Credit card videos

For more on this topic, check out this video:
Credit card debt warning signs

No matter what you decide to do, try to learn from your mistakes and not dwell on the past. "You've got to be aware that you are not a loser -- this is just a bad situation," Rhode says. "Deal with it and survive and move on."

See related: Be aware of tax bite that follow debt resolution, Credit card forbearance programs offer reprieve from debt, How debt settlement works, how it affects credit scores

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Updated: 01-19-2018