WHAT TO DO WITH YOUR DEBT AFTER LOSING A JOB?

Losing your job is a very stressful situation. And what to do if you have an extra worry about how to pay your debts? Without a job, it becomes very hard. When you don't have any savings, losing a stable source of income can make difficult not only dealing with your debts but also paying everyday bills. What can you do to improve this situation?

Insurance

Of course, it's better to prevent something than to have to deal with a problem. When you regularly save money and reduce unnecessary expenses, it can provide you with paying your debts peacefully for the first couple of months after losing a job.
But these days, it's really difficult to put huge amounts of money aside, even if we have a good bank deposit.
Before you take out a loan it's always recommended to obtain an insurance. That kind of policy can be very helpful when you find yourself in a tough financial position.

Payment Protection Insurance

Payment protection insurance (PPI) is an insurance product that enables a borrower to ensure repayment of credit in case of death, illness, disability, job loss or any other circumstances which cause an inability in paying off a debt.
Credit protection insurance covers payment for a specific period of time (up to 12 or 24 months). If the borrower is unable to return to work or diagnosed with critical illness some policies repay the debt in full.

Mortgage Payment Protection Insurance (MPPI)

Mortgage payment protection insurance covers your mortgage repayments in case you're not earning any money for a limited period of time.
This policy is also known as a Mortgage Indemnity Guarantee (MIG), especially in the UK.

In the past, you might not even know that you bought that kind of policy. So if you have lost your job, ask your lender whether your loan or mortgage is covered by insurance.
If you have an insurance, but your claim is refused, it means that your policy might have been mis-sold, which happens from time to time. In that case, you should be eligible for compensation.

If you don't have any insurance, keeping up your repayments could become really difficult. What to do in this situation?

A Loan Extension Request

Extension of the repayment term allows us to stretch payment of our debt over a longer period of time. It reduces a cost of a single monthly payment.
Most financial institutions allow a borrower to request additional time to repay a loan, but there may be some specific requirements which are stated in a loan agreement.
We should remember that extending the term of loan repayment is linked to paying bigger interest. We have to cover the larger quantity of instalments, so the APRC becomes bigger and our loan gets more expensive. It's always crucial to plan it well.

Payment Holiday

A payment holiday is an agreed period of time when a borrower can take a break from paying a debt. Depending on circumstances and our payment history, we can take a break for a month or even for a year.
Not all loans or mortgages offer the option of payment holiday. If you're interested, check your agreement or product's terms and conditions.
The sooner you apply for payment holiday, the more possible granting the request will be.
If you weren't very diligent about your payments so far, you might have a problem with getting it.

How To Cope With Remaining Debts?

If you're not sure of how you'll make your everyday payments, try to stay calm and reasonable. Here are some methods of coping with debts which you can use immediately.

1. Make a List Of All Your Debts

Create a distinct picture about your current position. You should clearly know how much money you need every month to pay your debts.
Your list should include everything, for example:

• Mortgage,
• Credit card,
• Utility bills,
• Rent,
• Loan.

2. Prioritize Your Bills And Debts

Having control over your payments is crucial. To manage this you should divide your debts on priority and non-priority ones.

What Are Your Most Important, Priority Debts?

• Mortgage,
• Rent,
• Utility bills.

Always cover them in the first place.

Consequences of non-payment:

• You can lose your home,
• You can be evicted,
• You can have your electricity or gas cut off.

What are your non-priority debts?

• Credit card bills,
• Bank overdrafts,
• Unsecured loans.

Consequences of non-payment:

• You could be taken to court and ordered to pay a fine.

The penalty will be proportionate to your current income.

3. Create Your Emergency Budget

You should have a clear picture of what your current income is and how much you spend every month on basic payments.
Check how much you pay for your household bills, rent and what are your living expenses. Now it's crucial for you to reduce these expenses as much as possible. So cut every unnecessary spending and find a way to cut your fixed expenses (like bills).
Try to be very frugal now.
Check how much money you have left after paying for these things and dispose of what's available to start paying your priority debts.

Losing a job while you have many debts can be really stressful but it isn't a no-win position. Act reasonable, try to save as much money as you can and you will surely cope with your repayments. In the meantime, be careful so you won't get stuck in a debt trap.

Author: Olga Gierszal