I’ve Been Aggressively Paying Down Debt But My Unemployment Ends in Three Months. – Shelia

“Dear Steve,

I had been aggressively paying down debt over the past couple of years (eliminated car loan and student loan long ago, and I have paid down credit card debt). I lost my job in July of 2009, and I have not yet been able to find another to replace it. I have enough to cover my bills in the meantime, but my unemployment benefits will run out in January 2011. When that runs out, I have about $6,000 in emergency savings and a $3,000 retirement account I can fall back on if I can’t find any part-time or full-time work.

I have lost my apartment but was fortunate to be able to move in with relatives so that I will have a roof over my head when my benefits run out.

I am trying to stave off depression by starting a money club (through wife.org) as a support group for women to learn together how to better handle our finances, and also by sending care packages and mail on a regular basis to a deployed serviceperson through HeroBox.org (I was matched with a female Marine gunnery sergeant in Afghanistan. How cool is that?).

I have a science degree, but I have been applying for anything and everything, down to the most basic clerical jobs. So far, no interviews, and the few companies that got back to me have told me I am overqualified.

I am reading your free ebook and that is very encouraging. Knowing that other people have gotten out of situations far worse than mine is very helpful.

I still have about $6000 in credit card debt to be paid, and at the moment I have been paying more than the minimum payment. When I receive extra money (have money left at the end of the month, gift money, money from doing surveys/reward programs), should I keep stashing all of it in savings, split it 50/50 between savings and debt repayment, or throw everything I can at the debt?

Any other advice or a kick in the butt that you can give me, considering my impending change in circumstances in the next few months? Should I think about dropping health/life insurance, selling my car, or taking some other sorts of drastic measures?

I’ve been unable to weigh the pros and cons rationally. I am feeling so much fear right now that I am having trouble making any financial decisions.

Shelia”

Dear Shelia,

I always prefer to give the bad news first so here it is. If there is no reasonable expectation you will be able to land a job before your benefits run out, you need to file for bankruptcy now.

You see, when those benefits run out you will hit the wall, and without the benefit of friends to shelter you, you’d already be homeless. Some actually define the inability to shelter ourselves as homelessness.

When those benefits end, if you are unable to land a job by then you will turn to draining your remaining funds and default on your debts. You’ll wind up in collections and potentially sued. All of this will be added stress and pressure on top of an otherwise precarious situation.

Frankly I think in this situation it it more logical and responsible for you to seek protection under bankruptcy. It sounds like you’d be able to qualify for a Chapter 7 bankruptcy. That will cost about $1,500 but the moment you file you will stop paying your creditors, collectors can’t call you and you can’t be sued over those debts.

If you don’t consider this approach then you will spend the last months of your benefits on making payments, you’ll spend down your remaining savings, and leave yourself homeless, with unresolved debt, and in a worse position.

If you feel a great responsibility to honor your promise to your creditors then once you get back on your feet you can pay them as you can without any demands from them.

On a positive note, let me congratulate you on all you are doing for others. Even in these trying times you’ve found that gratitude and helping others can have a positive impact on your own life. You rock.

You can click here to find a local bankruptcy attorney and if you’d like a second opinion about your situation or a personal consultation by another debt coach, please feel free to contact Damon Day.

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