What to do with debt if you lose your job

With the oil price still hovering at almost a third of the $115 (Dh422) high it reached in June 2014, many jobs in the Middle East are under threat. But many of the people who work in the region have built a life here and taken out credit cards and loans to pay for things such as cars and rent. So what do you do if the worst happens and you lose your job while in debt?

 

Take stock 

“The only way to cope with job loss in such a situation is to take stock of your personal finances and debt obligations and prioritise what needs to be taken care of first,” explains Ambareen Musa, Founder and CEO of financial product comparison site Souqalmal.com.

 

The first thing you should do, according to the experts, is make a list of everything you owe. That way you can make a plan to continue to pay for what you can with your savings and work out how much you need to restructure. “Take a free payment holiday if available or take a paid payment break,” says Preeti H. Bhambri, Founder and Managing Director at MoneyCamel.com. “Use this period to approach the bank.”

 

Talk to the bank

But before you do that, it might be a good idea to check what the bank’s policy is in such a case, says Musa.

“Your account is likely to get frozen while the bank carries out a check of your financial position and whether you will be able to pay off your outstanding debt. 

 

“Knowing about procedures, related documentation and processing time can help you stay prepared in such a situation.”

 

When it comes to speaking to the bank, it is best to meet a manager in person as calls sometimes aren’t recorded.

If you want to leave the country, Bhambri suggests asking for an interest waiver. “Give your complete contact information back home if you are going to stay around or if the bank refuses to allow you to go. Request for an interest waiver for some time and a payment holiday,” she says.

 

Next, form a strategy to pay off your debt in order of priority. There are two options here.

 

“This could either be based on the debt stacking method where you pay off the most expensive debt first, [for example] the loan with the highest interest rate first, or the debt snowball method where you pay off the smallest debt first, thus helping you get debt-free sooner,” says Musa.

 

Claim insurance

And if you have insurance  policies, this is the time to use them. “Some loans and credit cards cover you for job loss, but always be sure to read the small print to ensure that your individual circumstances are covered,” explains Jon Richards, Founder and CEO of Compareit4me.com. 

 

But even if you don’t have job loss insurance you might still be covered through your life insurance policy, which could include involuntary job loss cover as a benefit, adds Musa. 

 

Make a budget

Then you have to work out a budget to pay for your current commitments. “This is a better time than ever to get a hold of your finances,” says Richards. “Monitoring your incoming money and outgoing spend in a spreadsheet will allow you to plan for the time in which you may not have access to your bank account, or may have to stretch a months’ pay to two months.” He suggests downloading a money app such as Wally, which can help you keep track of what you spend.

 

But even if you don’t use an app, you should at the very least be tracking your expenses daily, says Bhambri.

Musa adds, “Prioritise your spending where you cut off unessential ones such as dining out on a regular basis [and] shopping. Only spend on the necessary items.” 

 

Prioritise payments

Missing bill payments could affect your credit score by the Al Etihad Credit Bureau, which will in turn prevent you from taking on more debt in the future. “Obviously it would be very unwise to miss a credit-card payment or rental cheque, so prioritise spends like these,” explains Richards. “Instead, choose wisely things you can cut, such as gym memberships, or your contract for your mobile phone.” 

 

Avoid more debt

He says although it is tempting to borrow more money to help you through the rough patch, you should avoid this if at all possible.  “Credit-card debt is the most expensive type and it is easy to get caught in spiralling debt if you owe more on it than you can afford to repay,” says Musa. 

 

And never withdraw cash using your credit card. The interest on that is charged at the highest rate of all, warns Bhambri. 

 

Emergency fund 

One way to avoid a crisis is by having an emergency fund separate from your regular savings. It should be a minimum of two to three months’ salary, advises Musa. But you should ideally have savings equivalent to a full six months of salaries if you have children, explains Bhambri.

 

Richards says, “When you resign or are let go from your job, it is the company’s responsibility to contact the bank in which your salary gets paid into. If you have any outstanding loans, as a precautionary method, the bank freezes the account until the next salary is credited.”

 

“Be prepared for this. Have some cash available to you, have your bills prepaid and possibly leave some money on another credit card to allow you to live until the next payday.”