How to Get Out of Debt After a Long Layoff

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in Career,debt

There’s much in the financial news and written on personal finance blogs about how to get out of debt. Cut this expense…lower that cost…clip coupons…and in X number of years you’ll be debt free!

For many, this type of trimming at the edges may be all that’s needed to reach debt freedom. But what if you’re on your way back from a trip to the very edge of the financial abyss—will making small cuts in your budget get you free?

Yes, it may be true that a lot of people have debt problems owing to over-spending and general poor money management but this certainly doesn’t describe every debtor.

After the global economic sinkhole we’re slowly climbing out of, there’s no small number of households that have completely burned through their savings and wracked up tens of thousands in debt just trying to survive. If you’re one of them, will cutting expenses and clipping coupons dig you out?

Let’s face it, millions of people have been through prolonged periods of unemployment representing months and sometimes a year or more in duration. While many are now finding work, the maxed out credit cards and empty bank accounts linger. You’ll never be fully recovered until both problems have been corrected.

If this describes your situation, you may need to go beyond superficial expense cutting, and hunker down for one or more life changing cuts—the kind that are painful, but can make a real difference.

Finding cheaper living quarters

With the housing bubble of the early 2000s many households took on more house—and housing debt—than they could reasonably afford. If you managed to survive the meltdown that followed, good for you! But if in the process you managed to retain the biggest line item in your budget, you may not see a measurable improvement in your finances even if you’re re-employed.

If a disproportionate amount of your income is going to keep your house, downsizing may be your best option. There are several ways to do this.

One is to move in with family. At best, this can probably be only a temporary arrangement, but even six months of greatly reduced housing expense may be all it takes to restock your bank account or to get a few credit cards paid off.

Another, if you’re a homeowner, is to sell your home and move into a rental situation, particularly an apartment. Not only can this lower your basic monthly house payment, but it can also lower utility payments and virtually eliminate costly repair and maintenance costs that have a way of popping up at the worst times.

If you have some equity in your home, you might free it up for non-housing debt repayment, lowering your expenses even more.

Still another option is to consider moving to a less expensive city. Some areas have considerably less expensive housing than others, and if you can move to one without taking a big cut in pay it might be worth considering.

Ditching a car—or at least the payment on it

The next biggest expense for most people is cars. Most of us have some level of attachment to our cars (or trucks) and that can mean an outsized car expense.

If you’re struggling to get back on your feet, you’ll be working against yourself if you’re driving two or more high cost vehicles—meaning vehicles with debt attached. At a minimum, you want to be sure you owe money on no more than one car, that way you can concentrate repayment and get out of debt as soon as possible. If you have two or more vehicles with loans, payoff will be slow—if it ever happens at all.

If you can, sell one of the cars with debt on it, and buy a “beater” (an old car that gets you from Point A to Point B and little else). It’s not a forever arrangement, but just something to do until you’re back in control of your finances.

Eliminate retirement contributions

A lot of financial advisors recommend shielding retirement plans even during a personal financial crisis. Retirement savings build over time, they’ll say, so you need to be contributing all the time, even if it’s only a little bit.

Let’s get into the real world—if you’re trying to survive in the minute, resources are limited and you don’t need to be contributing to a time in your life that may be decades away. As well intended as the fund-your-retirement-all-the-times advice may be, in order to build a strong financial future, you need to shore up the foundation that you’re on now.

Stop making retirement contributions until you have your debts under control, and some cash reserves for emergencies. Then it will be time to prepare for the future. In the meantime, you and your family can put the cash flow from the retirement contributions you’re not making to good use in more immediate concerns.

Raise your income

When expense cutting is insufficient to get you to where you want to go financially, the best option is to increase income. If you can both cut expenses and raise your income, you’ll get out of the weeds that much sooner. However, in many jobs today, the ability to earn additional money through overtime, bonuses or pay raises is severely restricted.

In order to increase your income, you’ll need to consider either a part time job or a side business. Though juggling two income sources is stressful, there may be a silver lining to it, even apart from the additional money. Either a part time job or side business can provide you with an opportunity to get into a line of work that you actually enjoy, and approaching it in that manner may be a way of “turning lemons into lemonade”. You do something you like AND you earn more income.

Even if you can’t find something you truly like to do, remember that the situation is temporary. Tie the part time job to the payoff of a certain debt, or to a desired level of savings in the bank, and you can give the job a real sense of purpose.

So why go through tough measures like these? Why not just cut expenses at the edges, save a little more, pay down your debts a little at a time, and let time work it’s magic?

For one thing, if you’re struggling, the sooner you put that behind you, the sooner you can get to the important business of building a long term future. For another, if you’ve experienced a prolonged period of unemployment, you know it can happen again. And if it does, you need to be ready.

Life is kind of curious that way—the disasters we’re prepared for never seem to hit, and if they do, it’s never quite as hard as when we’re caught blind-sided.

Have you been through a long unemployment recently? What did you do to get through it? More importantly, what are you doing to rebuild if it’s over?

(photo credit: Mark Hillary)

Kevin At Out of Your RutThis post is from FiscalGeek staff writer: Kevin Mercadante. I’m very excited to have him contributing to the site. You can find out more about him at his own blog OutOfYourRut.com.

{ 2 comments… read them below or add one }

Jackie 2010/11/05 at 9:47 am

I haven’t been through a long period of unemployment this downturn, although my husband was unemployed for a few months. But back during the last downturn (web bubble burst with 9/11) I ended up being unemployed for 4 years. During that time I lived on savings, tried to get a business to produce enough income to live on, etc. I managed to earn about 2K per year during that period. I cut my expenses to the bone, split household expenses equally with my boyfriend, deferred my student loan, and that was pretty much it.

Once I finally did get a (low paying!) job it was easy to get out of debt because I was used to living on way less than $1000 a month already.

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Kevin 2010/11/05 at 3:09 pm

Jackie – that’s pretty radical! It seems as if you had a natural disposition to do what you needed to do in order to survive and developed excellent life skills in the process.

I don’t know if most people react to financial hardship in a way that’s similar. Many have an expectation that things will get better next month, next year, by Christmas, etc. They live on optimism until the sheriff pastes a sign on the front of the house and options are well past gone.

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