5 rules to follow if you're unemployed with debt

By Emma Lunn

With 2.59 million people out of work in the UK (and 904,000 out of work for more than a year), according to the Office of National Statistics, those already struggling with debt bear a particularly heavy load.

Here are five rules to follow to prevent the unfortunate combination of debt and unemployment from ruining your financial situation for years to come.

1. Prioritise your debts: Work out which are your most important debts -- the ones that could mean losing your home or having your gas or electricity cut off.

"Credit card debt is not a priority debt, so you need to make sure that you repay priority debts such as your mortgage," says Una Farrell, spokeswoman for the StepChange Debt Charity (formerly the Consumer Credit Counselling Service).

Once you have determined your priority debts, look at the interest rates on your other debts and tackle the most expensive ones first.

2. Stop borrowing and stop spending: This means not taking out any more loans and not using your credit cards. Avoid taking out a debt consolidation loan without professional advice, and do not secure any loans against your home.

Put a lock-down on your daily spend, too. This is easier said than done, but try and scale back so that you are paying only for necessities rather than spending money on new clothes or cheering yourself up, for example. unemployed-in-debt

3. Find out if you are insured for job loss: Check whether your debt payments are covered by payment protection insurance (PPI). It's possible you bought this kind of insurance when you took out the loan or credit card, and it covers some of your payments if you lose your job or are too sick to work. If you have this coverage, contact the insurance company or the lender to find out more details about how to claim.

4. Ask your creditors for help: If you don't have insurance, you'll have to take action to stop your debt situation from getting worse. That means telling your creditors about your situation.

Get in touch with your creditors straight away and explain your difficulties. In some cases, they may be willing to freeze interest payments on a debt or accept lower minimum payments each month.

5. Call in a professional: A non-profit debt counselling agency can help you deal with your debts when you have no income and develop the most strategic plan for doing so.

 "One [plan] could be to reduce the monthly payments to the minimum amount while you look for a new job and then increase your monthly payment when you are working again," Farrell says. "However, your options depend on a range of factors, and you really need to seek specialist debt advice as soon as you lose your job. [A counsellor] can look at your situation and make a recommendation based on that."

6. Try to stay afloat: If you're unemployed and available for work, you may be able to get Jobseeker's Allowance and other benefits. To find out what you're entitled to, visit your local Jobcentre Plus. Although any benefits you get might not be enough to make debt repayments, they will help you keep your head above water -- and hopefully prevent you from creating new debt.

Some unemployed people with serious debt problems could also be eligible for a debt relief order (DRO). DROs allow some debtors to eliminate certain debts -- yet they involve following strict rules, so it's important to seek professional advice before going this route.

See related: Expert Q&A: A guide to downshifting, Debt payoff strategy: Selling your stuff

Published: 27 November 2012