How to Get Out of Debt With No Job

The bills don't stop when the paycheck does. If you're staring at a stack of statements while dealing with a lay off or other job loss, the temptation is likely to freeze: stop opening mail, stop checking balances, hope it just goes away. 

It won't.

The sooner you act, the more options you may have going forward. Some paths close the longer you wait.

Here's where to start.

What to do in the first 30 days

The first 30 days matter more than almost any other period. Creditors are still reachable. Accounts are still open. Your options are widest right now.

File for unemployment benefits first

Unemployment insurance is designed to replace a portion of your prior wages while you look for work. The exact amount depends on your state and eligibility. It probably won't cover everything, but it could buy time—and time is leverage.

Call your creditors before you miss a payment

Many creditors offer hardship programs for customers going through job loss, but they usually aren’t advertised. Depending on your creditor and your history with them, you could get:

• A temporary payment reduction
• A lower interest rate
• A fee waiver
• A short-term deferment

To access any of these, you need to reach out first. Creditors usually won't reach out to you. Be ready to explain your situation and ask specifically what's available for someone who has lost their job. 

Pay essential bills before unsecured debt

Limited funds mean prioritizing and picking your battles. Missing a credit card payment could damage your credit. Missing rent could mean losing your housing. Those are not the same kind of consequence. 

Pay what keeps you sheltered and fed first, then worry about the rest:

1. Food
2. Housing (rent or mortgage)
3. Utilities (heat, water, electricity)
4. Health and auto insurance
5. Secured debts (car loan)
6. Unsecured debts (credit cards, personal loans)

Prioritizing your bills is about managing consequences.

Tap government assistance programs

While you're stabilizing, government assistance programs could reduce your essential expenses and free up cash. You may have more resources than you realize:

• SNAP: food assistance
• LIHEAP: utility bill help
• 211.org: local emergency assistance

For a full overview of what could be available, start with: usa.gov/financial-hardship.

Once you've stabilized, the next question is how to manage your debt over the longer term. You need to decide which relief option actually fits your situation to help you handle your debt going forward.

If you still have some income or savings for ongoing payments

If you have some income, such as unemployment benefits or part-time work, savings, or severance, these options could give you breathing room while ideally avoiding missed payments.

Calling your creditor about hardship programs should still be your first move even if you've been unemployed for more than 30 days. If that doesn't provide what you need, consider these options.

Debt consolidation

If your credit is still in good standing, consolidating your debt into a single lower-interest payment could make it more affordable. A longer loan term could give you lower monthly payments while you look for new work.

Note that you will have to show proof of income to get a new loan. It could be retirement income, investment income, spousal support, anything you can document that you receive. If your job was your only source of income, you are not likely to qualify for a new loan.

• Personal loan: Borrow a lump sum to pay off your debts, then repay in fixed monthly installments, typically at a lower rate than your credit cards. You'll need some income and decent credit to qualify for a personal loan rate that actually saves you money.
• Home equity loan or HELOC: Using your home as collateral could open access to lower rates and larger loan amounts than an unsecured personal loan. Your home secures the loan, so it's at risk if you can't repay. You'll need some income and enough home equity to qualify.

If your credit has already taken a hit or you can't qualify for new financing, a debt management plan could be the next best option.

Debt management plan (DMP)

A nonprofit credit counseling agency negotiates with your creditors on your behalf to try to reduce your interest rate and get some fees waived. You make one monthly payment to them and they distribute it. You typically pay back 100% of what you owe, over 3 to 5 years.

Enrolled accounts may be flagged as DMP-managed, which future creditors could see. You'll likely need to close enrolled accounts as part of the DMP process. You may need to pay enrollment and program fees, so ask about these ahead of time.

If you can manage a lump-sum payment to get rid of your debt

If you've saved up some money, have access to severance or family help, or expect a tax refund, a lump-sum settlement could let you resolve the debt for less than the full balance. You could do this yourself or hire a professional.

Direct negotiation with your creditors

This is often the best first move, and it's free. You call the original creditor or debt collector directly, explain your situation, and propose either a reduced payoff or a modified repayment plan you can afford.

Some creditors may be willing to work with you directly when they wouldn't work with a settlement company. According to the CFPB, settlement companies may not get better terms than you could get by negotiating directly yourself, though you may find the likely time and effort investment worth the cost of outside help. 

If you'd rather not negotiate yourself, or your creditors aren't responsive, a settlement company could handle it.

Debt settlement through a company

This option works on the same principle as direct negotiation, but a third party debt settlement company handles it. You typically stop making payments to your creditors, and instead deposit money into a dedicated savings account to build up a settlement fund. The settlement company uses those funds to negotiate with your creditors, ideally settling your debt for less than you owe.

This could be a realistic path if you’ve experienced a significant loss of income that makes your regular monthly payments unaffordable.

Whether you negotiate on your own or with a company, there are some key considerations:

• There is no guarantee creditors will negotiate or accept a settlement you can afford.
• Creditors could still sue you while you're negotiating.
• Missed payments during the process could significantly hurt your credit.
• Forgiven debt may be treated as taxable income. A tax advisor can tell you what that means for your situation. 

When you're already behind, settlement could be what lets you get rid of your debt so you can stop worrying about that on top of everything else. 

If you can’t afford your debts even with partial forgiveness, settlement could be off the table. In that case, bankruptcy may be the right path.

If you don't have income or savings to work with

Debt that may have been manageable with regular income can quickly become out of control without it. Bankruptcy is a legal process designed for exactly this situation: when your debt is genuinely beyond your means and you have no hope of repaying it.

Bankruptcy

Most people will file one of two types of bankruptcy: Chapter 7 or Chapter 13. If you're without income or you’ve lost a significant portion of your income, Chapter 7 is what you want; Chapter 13 restructures debt and is intended for people with regular income.

A successful Chapter 7 bankruptcy could discharge all of your unsecured debts in a few months. You don't need income to be eligible; in fact, you may be ineligible if your income is too high. It requires a means test that compares your average monthly income over the past six months to your state's median income.

You might need to sell certain assets (valuables) if you have them as a requirement of Chapter 7 bankruptcy. Certain assets, like your primary home and vehicle, are typically exempt from these rules up to a certain limit. Consult a bankruptcy attorney if you're considering this route.

What to expect if you stop making payments

When money is tight, sometimes you have to pick your battles. If you've already stopped paying, or you're about to, here's an honest timeline. Knowing what could be coming should help you plan ahead.

The first 30 to 60 days

Missing your first payment usually triggers late fees and starts the clock. After 30 days past due, a negative mark could appear on your credit report for the missed payment. Your creditor will likely begin contact. 

You are still within a reasonable window to call and ask about hardship options. You're a customer who's behind, not a write-off yet.

30 to 180 days

Your account becomes increasingly delinquent. Around 180 days past due, many creditors charge off the account, an accounting term for debt that's been classified as unlikely to be collected and is considered to be a loss. 

The debt doesn't disappear. Many creditors sell charged-off accounts to debt collectors, at which point a debt collector typically takes over contact.

When a debt collector calls

Once a debt collector is involved, federal law kicks in. Under the Fair Debt Collection Practices Act (FDCPA), you have specific rights:

• The collector must send you a written validation notice within five days of first contact, describing the debt and your right to dispute it.
• You have 30 days to dispute the debt in writing.
• Collectors can't harass, threaten, or use deceptive tactics.

If you hire an attorney and notify the collector, they must direct all communications to your attorney instead of you. There is one exception: if your attorney doesn't respond within a reasonable period, the collector may contact you directly. 

Lawsuits and garnishment

Creditors and debt collectors could sue to collect if a debt goes unpaid long enough. If they get a court judgment, wage garnishment or a bank account levy could follow. (In a bank levy, the creditor is allowed to demand that your bank hands over the money in your bank account.)

The specifics vary by state, creditor, and debt amount. Some federal benefits are generally exempt from garnishment, including Social Security, disability benefits, veterans benefits, and federal student aid. If you owe delinquent taxes, child or spousal support, or student loans, you might be subject to garnishment no matter where the money comes from. 

Don't ignore a lawsuit if you receive one. Responding preserves your rights. Consult an attorney as soon as possible if you receive notice of a lawsuit; many offer free consultations.

The statute of limitations

Debt collectors don't have unlimited time to sue. Every state has a statute of limitations: a time window after which the debt is time-barred. Once it expires, a collector can no longer use the courts to collect on the debt.

In some states, making a payment or acknowledging that you owe the debt could restart the clock. The length of the statute of limitations varies by state and debt type. Your state attorney general's office can tell you the specific rules where you live.

Bills Action Plan

1. Deal with the immediate problems first. File for unemployment, contact your creditors, and make sure your necessities are addressed. Triage before worrying about unsecured debts.
2. Assess your options for managing your debt going forward. Do you have unemployment benefits, severance, or any part-time income? Is there sufficient savings to put toward settlement to get rid of the debt?
3. Match your situation to the right option. Consistent income: Consider whether consolidation or a DMP could make your debts more manageable until you're back on your feet. Lump sum or savings: Explore direct negotiation or debt settlement. No income or savings: Look into whether bankruptcy could be the right path.

Key Terms

Hardship program: A temporary arrangement with a creditor that could reduce or pause payments during a period of financial difficulty. Interest typically continues to accrue. Usually won’t reduce what you owe.

Debt management plan (DMP): A structured repayment plan set up by a nonprofit credit counseling agency; you generally repay 100% of enrolled debt at a reduced interest.

Debt settlement: A negotiated agreement where you pay less than the full balance owed, typically as a lump sum. You could negotiate on your own or hire a professional debts settlement company.

Charge-off: When a creditor writes off a debt as a loss, typically around 180 days of non-payment; the debt still exists and is often sold to a debt collector.

Statute of limitations: The time window during which a creditor or debt collector can legally sue to collect a debt; it varies by state and debt type.

FDCPA: The Fair Debt Collection Practices Act; federal law governing how debt collectors can contact and treat consumers.