Looking for a new job is stressful enough, but having outstanding bills can make it even moreso.
Before the coronavirus hit the United States at the beginning of March, unemployment was at 3.5%, according to the U.S. Bureau of Labor Statistics. Now, with unemployment hitting staggering rates in addition to reduced wages for workers and a teetering economy, millions of more Americans are struggling to make ends meet.
When income dries up, carrying the burden of debt can make tough financial situations worse. Deciding which debts to pay can be a complicated decision after a job loss, and forgoing debt payments can damage your credit score and cause foreclosures.
“You have to think through how to optimize a bad situation and know the trade-offs for juggling debts,” says Stephen Roll, Ph.D., a research assistant professor at the Social Policy Institute at Washington University in St. Louis.
From car payments to mortgage payments, student loan debts, and cell phone bills, it can be tough to figure out which bills to pay when your cash flow won’t cover it all. Here are some considerations for budgeting debts while unemployed.
Not all delinquencies are created equal. The consequences of your delinquency vary by lender, how late you are on making your payment, and the type of debt. For example, are you delinquent on paying an unsecured debt, such as a student loan or credit card bill, or late paying a secured debt, such as a mortgage or car loan?
Timing matters too. When you’re 30 days late on paying a bill, you’re likely able to recover from a late payment. If you’re 60 days late, your debt is severely delinquent but still recoverable.
When you’re 90 days late or more, it can be nearly as harmful to your credit score as defaulting on the payment altogether. Even if you don’t make the decision to completely default on the debt at this point, the bank will make the decision for you by engaging in the procedures they have for defaulting on a loan, whether that’s foreclosure or selling off your debt to a collection agency.
“It doesn’t matter if it’s a severe 90-day delinquency or an actual default, because the banks have usually already started the default process on those accounts,” Roll says.
Once you determine how much money you’ll be receiving from unemployment benefits and any other resources you can tap into like an IRA or retirement account, you’ll have to calculate if it’s possible to continue paying off your debt. The goal is to make at least the minimum payment on your credit card debts.
Continuing payments can prevent a hit to your credit score; at a certain point, missed payments can ding your credit score and show up on your credit report, which can make borrowing more expensive in the future. Before tackling loan payments, create an unemployment budget prioritizing basics such as housing and food.
“Food is often the first thing people cut when faced with some sort of financial shock as it’s relatively easy to justify it with, ‘I can eat less,’ or ‘I can buy generic,” Roll says.
As unemployment has increased because of coronavirus, so has food insecurity. According to a 2020 COVID impact survey from the Data Foundation, a nonprofit think tank, about 20% of households ran out of food before they had enough money to buy more in June. This compares to 2018, when about 11% of households were food insecure, the U.S. Department of Agriculture reports.
Hunger has long-term impacts on psychological and physical health for adults and children.
“These structural payment obligations should be seen as investments in your physical and mental health,” Roll says. “Prioritize essential payments over debt.”
Identifying automatic payments
Take inventory of your usual expenses to determine where to cut.
While automatic payments can help you avoid delinquencies and make financial management easier, they operate in the background. Reviewing your automatic monthly payments can be a place to start to figure out which expenses to cut. Maybe you have unessential subscription services — like entertainment apps or services — that you can put on hold for the time being.
“A lot of people don’t realize what’s being charged to their credit card every month,” says Monica Dwyer, a vice president with Harvest Financial Advisors. “Let your decisions about where your money goes be value-based.”
Even in normal times, if you have debt, it’s still important to accrue emergency savings. According to a 2020 study from Pew Research Center, only 23% of lower-income Americans had an emergency fund that could cover three months of expenses.
“You don’t want to be spending frivolously when you’re unemployed, but don’t feel guilty for dipping into your emergency fund,” Dwyer says.“This is what you have it for.”
The COVID-19 pandemic is an emergency, so spending your savings on necessities is perfectly acceptable. Even if people do have an emergency fund, sometimes they don’t want to use it in case the rainy day gets rainier. Instead, they’ll take out debt in the form of a personal loan or cash advance, Roll says.
“People like to have an emergency fund as a buffer and are afraid to use it on necessary expenses, Roll says, “but we are in the emergency.”
Contact your creditors
If you were already behind on credit card bills or personal loan debt before the pandemic, you may have limited options to make your case to your loan servicers for debt relief.
While many creditors have allowed borrowers to defer payments during the pandemic, many borrowers will owe all the back pay — or overdue amounts — all at once, which can be problematic.
Depending on your financial situation, it may make sense to start a debt management plan through a credit counseling agency, take out a debt consolidation loan, or declare bankruptcy.
Contact your credit card companies to find out what type of payment or deferment arrangements can be made. Your creditors will review your account to help make a decision to determine if you qualify to enroll in their financial hardship program until you’re back on your feet again.
A forbearance program may lower your interest rates, reduce minimum payments, or allow you to skip a credit card payment. Note: This program is not debt forgiveness, and you will have to pay the full amount back to the credit card issuer.
“It’s in their best interest for them to work with you,” Dwyer says. “Most of the time you’ll still owe the balance, but it can prevent you from getting further in the hole.”
According to a Capital Group survey, 32% of people consider it taboo to talk about how much debt they have, but you don’t have to struggle with finances and budgeting alone.
Nonprofit credit counselors, who can analyze your budget and provide recommendations for your financial situation, don’t charge for their initial budgeting sessions. Counselors can also reach out to creditors to discuss restricting debt and interest payments on your behalf if you enroll in a debt management plan.
Monica Dwyer is a certified financial planner practitioner and certified divorce financial analyst with more than 15 years of experience. She is the vice president and wealth advisor at Harvest Financial Advisors. She is affiliated with the Financial Planning Association. Dwyer has a passion for educating and planning for widows, divorcees, and those planning for college or retirement. She volunteers as a Financial Planner for Family Reach, an organization that helps families impacted by cancer.
Stephen Roll, Ph.D., is a research assistant professor at the Social Policy Institute at Washington University in St. Louis, where he is one of the lead researchers on the Refund to Savings Initiative. His research focuses on promoting asset building, debt management, and economic security in lower-income populations. In addition, he is involved in research on child savings, food insecurity, and the role of financial technology services in promoting financial well-being.
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