Of all the factors that cause credit problems, income disruption is perhaps the most overwhelming. After all, income is required in order to service debt, and when that income is disrupted, it means your ability to maintain your credit profile virtually disappears.
But that’s not all.
You May Have to Juggle Debt Payments
This is the most basic problem caused by income disruption in relation to debt. Since you will need whatever resources you have – unemployment insurance benefits, personal savings, and help from family and friends – just to survive, there may be no money left over to pay your debts.
In addition, you may need to prioritize your debt payments. For example, you’ll have to make a priority of paying your monthly mortgage payment otherwise you will lose your home. Next you’ll have to make sure that you make your car payment, that way you won’t lose your car to repossession, and with it your ability to earn a living.
Only when those debts and your other basic living expenses are paid, will you be in a position to even consider tackling less critical debt, such as credit cards, installment loans, and even student loans.
An Income Disruption May Force You Deeper Into Debt
The loss of income is often compensated for through the use of fresh credit. Many people who lose a job resort to using credit cards to pay the bills. They believe, often mistakenly, that the loss of income will only be temporary. But if it drags on for more than a few months, your debt levels can reach the frightening levels.
This will create two fundamental problems:
- An increased debt level will result in higher monthly payments, and
- An amount of debt that you’ll be unable to pay off anytime soon
Whatever other financial problems you’ll have as a result of the income disruption will be magnified by these two outcomes. That’s why it’s so important to take drastic action when you find yourself in this situation.
An Income Disruption May Leave Your Credit Ruined
Whether it comes about as a result of increasing debt levels, or because you simply lack sufficient resources to continue servicing your debt, an income disruption has the very real potential to destroy your credit. This can happen even if you previously had a perfect credit rating.
Consider the various ways this can happen:
All of your income may go into basic survival. When income is scarce, paying for the basic necessities will be most important. That will include food, shelter, health care, utilities and car expenses. You will also need to continue paying your monthly cell phone and Internet bills, so that you can conduct a job search. After paying all of these expenses, there may be no money left over to pay your creditors.
The income disruption might last much longer than you think. This is the X factor when it comes income disruption. If it lasts for just a month or two, you’ll probably be able to get by without hurting your credit. But if goes on for six months, a year or longer, it can leave you broke and deep in debt.
Periods of income disruption often come with more than the usual number of emergencies. There’s something of an almost cosmic connection between income disruptions and emergencies. Emergencies seem to become more frequent when income is disrupted.. It could be a rash of car repair expenses, uncovered medical bills, or even home repairs. And complicating this is the fact that you will likely have to pay the full price on your health insurance coverage. That’s an ongoing emergency all by itself.
Your savings may be completely used up. A survey published by GoBankingRates indicated that 62% of American households have less than $1,000 in liquid savings. That’s barely enough to pay for a single major car repair. But even if you have the standard 3 to 6 months living expenses saved in an emergency fund, you will be broke if your income disruption goes past six months.
Any one or a combination of these events could leave you unable to service your debt. If that’s the case, then your credit will be virtually ruined as a result of the income disruption. And that means that you will have credit problems even after you are re-employed.
Your Replacement Income May Not be Sufficient to Service or Payoff Higher Debt Levels
In addition to destroying your credit, a prolonged income disruption may also leave you with an ongoing problem.
Increased debt obligations as a result of the income disruption could mean that your replacement income is not sufficient to make all the monthly payments. In addition, credit problems usually result in default-level interest rates, such as a credit card rate that goes from 11% per year to 29%. The combination of higher debt and higher interest rates will make it much more difficult to make the monthly payments.
If all of your liquid assets have been drained, you also might not be in position to pay off the extra debt that you took on during your time of unemployment. This will have the net effect of making the new debt a permanent part of your financial life.
To make matters worse, all of these outcomes will be compounded in the event that the replacement job comes with a lower income than what you had in the past. This may force you to live with a higher level of debt – and less net cash flow – as well as damaged credit. That will make debt consolidation loans difficult or even impossible to get.
Legal Help May Be Your Only Workable Solution
If you have come through a prolonged period of income disruption, there may be no realistic alternative to engaging in some kind of debt solution. If your debt level gets too high, or your credit is too badly damaged, trying the do-it-yourself approach to fix the problem might fix nothing.
Rather than prolonging the crisis by trying to fix it on your own, you may need to get professional help. That will be your best chance to get out of debt and begin repairing your credit. And the best way to do that is by using the services of a law firm that deals specifically with credit and credit repair.
An income disruption causes a tremendous amount of stress not only to the person who lost the income, but also to the entire household. The sooner that the problem is reversed, the sooner everyone can get on with the business of living life.