Debt repayment becomes much more challenging when the individual is unemployed. Income is substantially reduced, making it necessary to develop a debt management strategy in order to prevent the credit score from declining. Identifying sources of income is the first step. Consumers should find out how much unemployment compensation they will receive and they should review their bank account balances to ensure that enough money is available for rent or mortgage, utilities, food, and transportation.
It is necessary to list each credit card, its balance, interest rate, and monthly payments. After summing the monthly payments, compare this to monthly income. If the monthly payment figure exceeds monthly income, there will not enough money to pay all bills and make credit card payments.
In this case, each credit card company should be informed of the situation. These providers will do what they can, including lowering the interest rate or the minimum monthly payment. Some will even agree to eliminate fees or freeze interest for between six months and one year.
If the individual is able to arrange a new monthly payment with a creditor and delay making the next payment as long as possible, this should help the financial picture. If even reducing the monthly payments will not help enough, the individual should inform the credit card companies that payment cannot be made.
If the debtor does not make a payment on an account for 180 days, some providers will charge the balance off as bad debt and send the account to a collection agency, which has a negative effect on the credit report.
Some creditors offer a forbearance program that temporarily suspends debt repayment obligations, providing the individual with time to find a new job. Other creditors may agree to settle the debt for less than the current balance, saving the debtor money.
However, this can have negative ramifications for the credit score so seek professional debt management advice before pursuing this option.
A debt management company can help consumers deal with otherwise unmanageable debt situations. Many firms do not charge for their advice or assistance. They will review your financial situation and recommend one or more informal or formal debt management programs.
In the meantime, try to secure at least a part-time job to increase income because many debt management solutions come at a cost.
If an informal arrangement cannot be negotiated, several formal solutions are available. An Individual Voluntary Arrangement, Administration Order, and Debt Relief Order are commonly used formal debt management programs within the UK.
Debt can also be consolidated by taking a loan to repay existing debts, lowering the interest rate and monthly payment.
Bankruptcy is a last resort, designed to protect individuals who have no way to repay their debts. The court directs creditors to cease collection activities and the individual stops making debt payments. After about one year, the covered debt is discharged and the individual has no further obligation to repay it.
Bankruptcy can affect the credit rating for up to ten years.
