Unemployed Debt Consolidation Guide
Can you consolidate debt despite job loss and challenges caused by limited income?
When you lose your job – particularly if it’s your primary source of income – it creates a high-stress situation with debt. Do you drain your savings to keep up with your bills? Should you use one credit card to pay off another? How do you stay afloat until you find another source of income?
Thankfully, there are steps you can take to reduce the burden of high interest rate credit cards on your budget. With the right debt consolidation solution, you can reduce your monthly payments to make it easier to keep up. Here is everything you need to know about debt consolidation for unemployed workers…
Can I consolidate if I don’t receive a paycheck?
The answer depends on what your finances look like at the point when you lose your job. If you have a financial safety net established before you lost your regular paychecks, then consolidation may be beneficial. However, if your financial tank is empty and your bank accounts are all at $0, then consolidation may not work.
Any option for consolidation requires you to make monthly payments
No matter which debt consolidation solution you use, it will require you to make monthly payments:
- A credit card balance transfer, even with 0% APR, will have a minimum monthly payment requirement
- A debt consolidation loan has fixed monthly payments you must make each month
- A debt management program also has fixed monthly payments that you make to the credit counselling agency; that way, they have funds to disburse amongst your creditors.
If you have absolutely no income available to make payments, then consolidation usually isn’t a viable solution. However, if you have some means of making reduced monthly payments, then there may be good reason to consolidate.
Debt consolidation usually means you pay less
In most cases, the right choice for consolidation will reduce the total monthly payment obligation you have for your debts. Once you roll all your debts into one payment at the lowest interest rate possible, the amount required usually decreases. For instance, debt management program clients typically pay 30 to 50% less in total each month.
This can be extremely beneficial when you’re unemployed. Until you reestablish a regular income source with paychecks at a new job, you need to minimize costs. So, it makes sense to consolidate because you reduce the burden of your debt on your budget. You just have to make sure you can cover the reduced payment amount until you get a new source of income.
What’s the risk of consolidating with no income?
The risks associated with unemployed debt consolidation vary based on which option you choose:
- If you fail to make the minimum required payments on a balance transfer, it can lead to penalty APR. This means instead of 0% APR applied to your debt, you could face penalty APR that can be upwards of 30%. Creditors apply penalty APR if you miss a payment by more than 30 days. Then if you don’t pay for more than 6 months, the creditor will charge off the debt and send it to a collector.
- If you don’t make payments on a debt consolidation loan, you can face penalty fees; refer to your loan agreement to see how and when the lender applies penalties. Nonpayment of a loan can also lead to default; it will go to a third-party collector.
- If you don’t make the payments on a debt management program, you can get kicked off the program. You can miss one payment if you make arrangements with your credit counsellor to catch up. However, if you miss more than one or don’t make arrangements, you lose eligibility. Creditors will still credit any payments make prior to that. However, your original interest rates and penalties may be reapplied on each account you included in the program.
This means that you have to be very strategic when it comes to consolidating without a steady source of income. It can help you in the right circumstances because it makes your debt more affordable. However, it can lead to trouble if you don’t find a job soon so you can stick to your repayment plan.
3 tips for deciding to use debt consolidation option while you’re unemployed
#1: Only consolidate if you have the means to make the payments
This means you need at least some income or source of cash flow to make payments on the consolidated debt. If you have a part-time job, freelance work or savings you can tap to make the payments, then consolidation could be right for you.
On the other hand, if your bank accounts are in overdraft and you don’t have any source of funds, consolidation won’t work. You’re better off focusing on getting a job and dealing with your debt when you have new income established.
#2: Timing is everything
Before you choose to consolidate, also consider how long you think you’ll be without income. If the job market is good and you’re confident you can find another position within a few months, then consolidate. By contrast, if you work in an industry with slow job uptake or you got laid off in a small town with many other workers, then this can be more problematic.
Look at the job market and consider your path to reemployment carefully before you consolidate your debt. You don’t want to increase financial stress with a countdown to default in a situation that’s already stressful.
#3: Be upfront with anyone that helps you consolidate
Whether it’s a credit counsellor or lender, don’t try and hide your situation from the organization that’s helping you consolidate. Be honest about the fact you lost your job, have limited income or may be making payments out of savings. This allows the lender or counsellor to help you evaluate your situation realistically.
- How many payments do you have before the situation becomes unsustainable?
- How much income would you need to cover those payments for 6 months more? (i.e. would a part time job be sufficient to cover your obligation?)
This type of planning ensures that you and the consolidation service provider are on the same page. It can also help you get a plan in place for reentering the workforce. You may decide to freelance or pick up a side job to stay ahead of your payments. In any case, you can move forward with confidence!