How to Reduce Debt When Losing Your Job

Losing your job can be both psychologically difficult and financially stressful. If you are about to lose your job and source of income, and you are contending with overwhelming debt, you have a challenge ahead of you. It is still possible, however, to reduce debts while you are unemployed. It does take discipline and perhaps some help from a debt counselor.

Instructions

1

Apply for unemployment benefits as soon as you lose your job. The earlier you begin the process, the earlier the application will be processed and, hopefully, approved. These benefits can help defray living expenses while you work on debt reduction.

2

Do not liquidate all assets, savings, retirement funds and investments. This may be tempting. You'll need an emergency fund now more than ever. Make sure you have a fund (of liquid capital) that can carry you for six months without any income.

3

Focus on the most burdensome debts only. It's unreasonable to expect that you can eliminate your debts while your income is drastically reduced or non-existent. Instead, find the largest, highest-interest accounts to begin repaying.

4

Take money from some of your other accounts. While you should not liquidate everything (see Step 2), you can benefit from removing some of your savings to help get you by. One option that is utilized by many Americans is the 401k loan. You can often access up to 50 percent of your 401k balance without paying early withdrawal penalties or taxes. Consider taking money from investments and savings too.

5

Create a new budget based on unemployment income, funds you pulled from other accounts and your severance (if available). Cut all non-essential expenses: eating out, entertainment and luxuries. Pay minimums on all accounts you are not actively paying down. This will free up enough disposable income to make larger payments against those higher-interest accounts.

6

Find a credit counselor if you are still struggling to get your debts under control. Start your search at the National Foundation for Credit Counseling. This is the association that approves reputable credit counselors. You may be able to reduce interest rates, eliminate fees and create a more manageable repayment plan.