According to a May 2022 LendingClub survey, around 64% of Americans live paycheck to paycheck. Living paycheck to paycheck is not an issue isolated only to low-income people. It can happen to anyone at any income level. So what happens if you lose your job?
Will you be able to consolidate your debts to keep the bills paid?
Table of Contents
Focus on your job search first
Debt consolidation after a job loss will be tricky – but not totally impossible. If you can prove that you still have the ability to make monthly payments, have a steady source of income or got a severance package, qualification will be easier. However, there are a few things that should be higher on your priority list before worrying about debt consolidation.
Pro tip: Your top priority should be finding a new job. It will be easier to consolidate debts – and pay bills – when you have a steady paycheck. You still may be able to consolidate debts while collecting unemployment, but you’ll end up paying more in the form of higher APRs. Job searches don’t necessarily need to be expensive since many job posts and applications are online. Social media, such as Linkedin, is a great place to start a search.
READ MORE: Need money now? How to get free money and other assistance
Complete these 12 steps ASAP
- File for unemployment benefits: While this procedure differs in each state, unemployment benefits are not instant. The faster you file, the sooner you’ll start getting benefit payments — as long as you’re eligible.
- Make a budget: Calculate any income and savings. How much money is in your bank account? Account for mortgages and car payments first because those both need to be a priority. Assess your other expenses. Do you still need a premium cable package? Is there a cheaper cell phone plan that will work for you? Tally up your subscriptions and determine whether you truly need them in the short term. If you aren’t sure how to get started, sign up for a free budgeting app.
- Make sure your basic needs are covered: If you’re worried about food costs, you may be eligible for food stamps or free school lunches for the kids. A car will be a priority since you’ll need transportation (and it could offer some income if you have time to deliver meals or groceries for a delivery service). Reduce energy consumption to cut utility bills. And don’t forget health insurance: Did your severance package include coverage? Is there a plan that meets your needs at HealthCare.gov? If those prices are out of your budget, there are short-term policies that will cover you in a crisis.
- Call your creditors: If you have been laid off, contact your creditors — the sooner, the better. Do not wait until you’ve missed payments and have fallen significantly behind. Your lender may offer a hardship program where your payments can be frozen, your interest rates lowered or may offer forbearance until you find a new job. Ask if minimum payments could be reduced or whether late fees could be waived.
- Contact your auto loan lender: Ask if payments can be temporarily deferred.
- Contact your student loan provider: Request that your loans be placed in forbearance.
- Call your utility company: Ask about payment plans or any relief they can offer.
- Continue to make your minimum payments: If you skip them, you could pay late fees, which add up quickly. If you can’t make the minimum payment, call your creditor, explain the situation and ask if any programs could help you.
- Does the government owe you money? Approximately one in 10 Americans have unclaimed property. Your state will have a database, or if you’ve lived in multiple states, you can try a multi-state search.
- Talk to a credit counselor: The consultation will usually be free, and the credit counseling agency will be able to advise you on whether debt consolidation is a realistic option based on your financial situation. They will also help you with money management advice.
- Pull your credit reports: Learn your credit scores. See how much you owe and to whom you owe it. Look for any errors that could be dragging down your score. Start taking steps to boost your credit score. Bad credit scores don’t only affect your odds of borrowing money — the federal Fair Credit Reporting Act says potential employers may review your credit score, so a bad credit score could keep you from finding a new job.
- Look for government assistance: The government will not help you repay credit card debt, but it offers programs that may be useful. File for unemployment as soon as possible because the process can take a while. Recognize that each state has its own guidelines for unemployment claims, so you’ll need to check on the filing process in your state.
READ MORE: Debt consolidation pros and cons
Pro tip: Are you severely depressed due to your unemployment? If so, help is available. Please dial 988 to contact the Suicide and Crisis Lifeline. It’s open 24 hours a day. You DO NOT need to be suicidal to call the crisis lifeline. Anyone with emotional distress can call. Sometimes it helps to talk things through with someone else.
Other programs to investigate include:
- Temporary Assistance for Needy Families (TANF)
- Social Security
- Supplemental Security Income (SSI)
- Supplemental Nutrition Assistance Program (SNAP)
- Medicaid
- Children’s Health Insurance Program (CHIP)
- Food pantries
- Soup kitchens
Pro tip: A good credit history could help lenders approve your financial hardship, as unemployment could be seen as a short-term setback.
READ MORE: How does debt settlement affect your credit score?
Ask yourself why you want to consolidate debts
Are you struggling to make payments during your job loss, or are you simply looking to simplify your finances while searching for a new job? Debt consolidation can be a good option if your credit score is good and you have significant savings or a severance package. If you need debt relief because you can’t make your payments, try the above steps first. If that doesn’t work, there are still some other options for debt relief.
READ MORE: How to consolidate debts and best loan options
Pro tip: It is challenging for the unemployed to consolidate debts due to the monthly payment requirements. All debt consolidation plans require a monthly payment, and lenders like to see borrowers have a source of income for repayment. Missed payments on any debt consolidation plan can negatively impact your credit score and you could end up making your debt issues worse instead of better.
READ MORE: How to qualify for a debt consolidation loan in six easy steps
Other ways to get your debt under control
- Can you use a secured loan? It may be tough to meet eligibility for a loan if you have no income, so you could put up something as collateral to make it a secured loan. Offering collateral would mean the lender would take ownership of these items if you default on your repayments. Collateral can include vehicles, jewelry, art, coins, investments, or other valuable assets.
- Is a home equity loan an option? For homeowners, a home equity loan or line of credit could be a viable option to consolidate your debt while unemployed. Be aware that you will jeopardize your home if you default on your payments. This type of loan for debt consolidation tends to have lower interest rates than all other kinds of loans, longer loan terms, lower monthly payments, and a predictable payoff process if you get a fixed-rate loan.
- Do you have a co-signer or guarantor? Finding someone willing to vouch for you on a loan application may help you qualify for a debt consolidation loan or balance transfer credit card.
- Apply for a Payday Alternative Loan: These small loans issued through credit unions can help you cover a sudden emergency expense without the sky-high interest rates and quick repayment deadlines of a payday loan.
- Talk to a debt settlement company: A debt settlement company will negotiate with your creditors, and you likely will end up repaying less than you owe. Only certain unsecured debts are eligible for debt settlement. Debts like child support, alimony and utility bills cannot be settled.
- Try a Debt Management Plan: These are usually set up and managed by nonprofit credit counseling agencies. The credit counselor will negotiate with creditors to lower your interest rates and will set up a repayment plan. There will be a monthly fee for this service that usually ranges from $25 to $55. Other counseling services are free.
- Consider bankruptcy: If you qualify, Chapter 7 bankruptcy could offer a fresh start. This should be a last resort, though, because your credit score will be severely damaged for several years. If you think this is your best option, please contact an attorney for legal advice.
READ MORE: Types of bankruptcy
Will I be able to get a new loan or credit card if I am laid off?
While it’s possible that you might be able to get accepted for a new loan or credit card while unemployed, it isn’t the best idea. It could encourage overspending, and your interest rates will likely be significantly higher.
READ MORE: Does debt consolidation close credit cards
Avoid payday loans
A payday loan might seem like a way to get some quick cash when unemployed, but it can be a vicious cycle that will leave you in worse debt than you started. Find a different way to get the funds you need.
If it’s too late and you’ve already turned to payday loans, please follow these steps to get out of payday loan debt.
To learn more about the problems with payday loans, check out this video:
READ MORE: Best debt consolidation loans for military vets
The Bottom Line
Choosing the right option for your specific circumstance for debt consolidation will give you the best shot at getting approved. Make sure to weigh the pros and cons of all available avenues. And check your credit report before applying and see if you can improve on this before applying for the loan.
FAQs
Every lender will set their guideline regarding specific minimum credit score requirements. But typically, lenders look for a minimum credit score of 650 which falls into the “fair” range based on the FICO scoring model. To get the best rate, you must have at least a 720-credit score to qualify for the best rates. But it isn’t impossible for those with bad or fair credit to qualify, but you will pay higher interest rates. You will want to check your credit report before applying for a loan and see where to improve your scores.
No, not if you can meet your monthly financial obligations. It will hurt your credit score only if you cannot pay your bills. Some lenders will offer you a grace period for a certain amount of time, and some may have an interest rate freeze up until a particular date. If this is the case, you will want to contact your creditors as soon as possible to discuss financial hardship programs with them.
It can make sense in rare instances, but you will reduce your retirement savings, so you must weigh the pros and the cons. For instance, using it to pay off a high-interest-rate credit card can be beneficial. If you are 59.5 years of age, you are free from the 10% penalty and taxes. If you are in a low tax bracket, this may make sense as well to withdraw from your 401(k) to pay off credit card debt. You will also want to stop or cut back your 401(k) contributions while unemployed and redirect those funds to paying off your debt. Looking into taking a loan from your 401(k) is preferable to a withdrawal since the loan rates are typically 5%, which is far better than the APR on credit cards, plus the interest paid goes back into your savings rather than to a bank. The best part is it doesn’t require a credit check and doesn’t show up on your credit report as a loan.
Credit card companies actually don’t have a ton of options if you stop paying your bills. They aren’t allowed to garnish your unemployment check (these are exempt from liens). They can’t take your vehicle or house. They can’t garnish wages because you won’t have any.
However, they can turn your debt over to a debt collection agency, or you could be sued. If this happens, you have some rights. The Fair Debt Collection Practices Act regulates actions debt collectors can take. If you get a court summons, don’t panic. First figure out whether the lawsuit is accurate. If it is, you can either contact an attorney or defend yourself, but make sure you appear for your designated court date. If you ignore a court summons, your problems will only get worse.
If you can afford it, yes. It will help your credit score and prevent you from paying late fees and penalties. Since prospective employers may review your credit score, you want to keep your score as high as possible during your job search.
