Losing your job is one of the most traumatic experiences you might experience in life. Even if you suspect your job may be at risk in advance, being dismissed or made redundant has long been recognised as a major cause of stress and illness. Especially when it might create debt problems, or cause existing financial issues to get worse.
But it’s important not to panic, or blame yourself. There’s no shame in being made redundant as it can happen to anyone. Your focus should be on the future, as you’ll benefit from getting support, understanding your options, and taking steps to improve your situation as soon as possible. Just taking a few simple steps to look after yourself and your family will make redundancy more bearable and less financially damaging.
Acting quickly is even more vital in uncertain situations. In 2020, most people in the UK have seen the Covid-19 pandemic impact on household incomes and budgets. It may mean worries about the end of the government furlough scheme and a potential UK recession causing more job losses. So, by researching your options now, you’ll be better prepared should the worst happen in the future.
We can help you find the time to organise your finances with DebtBuffer letter templates. They’ll help you explain to creditors you’re entitled to breathing space while putting debt solutions in place, and that you should be considered vulnerable due to a recent job loss.
How can you deal with debts if you’re made redundant and unemployed?
The earlier you can start preparing for redundancy or unemployment, the easier it will be to cope with existing debt problems or new financial issues. If you feel your job might be at risk, it’s important to consider ways to handle the drop in household income, and how to best use any redundancy payment.
Even if you’re unexpectedly made redundant, acting quickly can stop your situation getting worse while you’re between jobs, and minimise the impact on your income when you’re employed again.
Steps you should be taking to cope with redundancy include:
- Cutting back on spending and credit: Your focus should be on making any money available last as long as possible. This means cutting back on any non-essential spending, and avoiding using more credit or loans unless they’re absolutely necessary.
- Check for all eligible benefits: This includes Universal Credit, Job Seekers Allowance, Council Tax Support and any other help you may be entitled to receive. You should get advice from the CAB or other debt support organisations to ensure you’re getting the most beneficial combination of assistance.
Any redundancy payment will be treated as savings rather than income when it comes to benefits such as Universal Credit, and won’t change your Jobseeker’s Allowance.
- Contact existing creditors: You may be able to take payment holidays on most debts, or apply for an extension on an existing break due to new guidelines during the Covid-19 pandemic, as long as you apply before October 31st, 2020. This will be a temporary solution if you’re likely to find new employment fairly quickly, but you’re also entitled to breathing space if you’re organising a debt repayment plan.
- Look for ways to increase your income: While you’re looking for a permanent new job, don’t rule out temporary roles to bring in money during your search. If you own your home, it’s possible to rent a spare room, sell items you’re not using, or look at other legitimate sources of extra money in the short term.
- Make a Redundancy Tax Refund Claim: this can help reclaim tax you have overpaid in the current tax year. If you suspect you will be out of work for a while, putting this overpaid tax back in your pocket to help with your cost of living could be a very good idea.
- Check suitable debt solutions: It’s important to research and understand the available debt repayment solutions, and how your options will change depending on whether you’re facing redundancy, or have already been made redundant.
Creditors will want to recoup as much of their money as possible. So, they will be more understanding if you contact them to explain your situation rather than missing payments and letting defaults and debts build up. You can use our DebtBuffer letter templates for various situations, including to secure 30 days breathing space if you’re organising a debt solution, or to let creditors and debt collectors know if you’re potentially vulnerable due to illness, mental health, or recent unemployment.
If you’re struggling with existing problem debts and receive a redundancy payment, it can be tempting to pay off as much as you can to clear your finances. But it’s better to keep that money to cover your essential priority bills.
Until you start a new job, you can’t be sure how long your unemployment may last. So, you should use any money or income to ensure you can survive in the meantime.
The exceptions are if you have arrears on priority debts, such as rent or mortgages, council tax or utility bills, as these can carry harsher enforcement or have big repercussions on your living standards. And obviously if your redundancy money covers any debts and still leaves you with a reasonable amount for living costs, then it’s worth considering.
Make sure you don’t keep any redundancy money in any account with a bank to which you owe money. Otherwise they may take it as a repayment (known as the right to offset). So even if it’s in a savings account, they would be able to move it to pay off credit cards, loans or overdrafts on other accounts without your permission.
Your redundancy payment will be treated as savings rather than income when Universal Credit is calculated. If you have savings of more than £6,000 it will affect how much you can get, and if you have more than £16,000 saved, you won’t be eligible. But redundancy payments don’t affect other benefits, such as Jobseekers Allowance, for example.
When you’re planning around any redundancy payment it’s important to consider how this may be used if you enter into a debt solution. For example, if you’re planning to tackle your debts with an IVA, any redundancy payment above six months wages will be paid to your creditors. So, you might decide to either wait before starting an IVA, or enter into a DMP to start tackling your debts without losing any redundancy money, and then switch to an IVA later on.
How does Income and Payment Protection Insurance work?
Income protection insurance (also known as permanent health insurance) will only cover you if you can’t work because you’re ill or injured. But there are two options which will help with the financial impact of redundancy and unemployment:
- Payment Protection Insurance (PPI)
- Short-term income protection insurance (STIP)
You’ll probably be familiar with PPI due to the large-scale claims against companies which mis-sold policies. But that doesn’t mean that it can’t help you if you’re unemployed. Also known as Accident, Sickness and Unemployment (ASU) cover, or Mortgage payment protection insurance (MPPI), it will typically start paying 3 months after your earnings stop to cover the relevant loan or mortgage repayments (although some MPPIs will pay an extra sum to help with other bills). And it will generally cover you for 12, or 24 months.
Short-term income protection will also last for a fixed 12- or 24-month period. Rather than applying to specific repayments, it will give you a proportion of your income (usually 50 or 60%). Again, it will take three months before these payments will begin.
As with any insurance policy, you should carefully check the terms and conditions. You will not be covered if your company has already announced redundancies, or there are rumours of job losses. And most policies won’t cover anyone who works part-time, on a temporary contract, or is self-employed.
During the Covid-19 pandemic and with many people on furlough and worried about redundancy, many insurers have changed their policies to continue to offer cover for illness. But they have largely removed unemployment cover for the foreseeable future.
What happens to credit card debt if you lose your job?
When you become unemployed, your debts will carry on as normal. Especially if you don’t contact your creditors to let them know what’s happened.
If you can’t afford to make minimum payments, you can ask to pause or defer them. This will work to give you some time and space, and especially if you’re likely to find a new job in the relatively near future. This can work in the short term, although it’s not guaranteed that creditors will agree, and interest may still build up.
There are some new FCA guidelines for credit cards and loans applicable until October 31st, 2020 due to the impact of the coronavirus pandemic. This includes being able to take a three month payment holiday as long as you apply before the end of that month, or agreeing to partial payments.
You’re also able to ask for a further three-month extension, however your lender can deny this if it believes your financial difficulties will increase. Instead, they’ll suggest other measures such as freezing interest or a repayment plan.
Some credit card companies have also waived fees for missed payments, and will offer emergency credit limit increases, but these vary between lenders. None of them will stop your credit card until after October 31st, 2020.
It’s possible you might be able to transfer to another card with a 0% balance transfer depending on the amount you owe, which could reduce your debts. But if you have existing missed payments and defaults showing on your credit score, this is likely to be difficult. And if the UK is entering an economic downturn, it’s likely that acceptance criteria will be stricter for borrowing in the future, so if you need to cut interest with a balance transfer, it’s best to do it as soon as possible.
So if you’re struggling to make minimum payments and your credit card debt is getting worse, you should look at debt solutions including DMPs, IVAs, DROs and bankruptcy to either repay the debt in full at a more affordable rate, or to have some of the debt written off after a set period.
Can I get help with my mortgage or rent if made redundant?
If you took out Mortgage payment protection insurance (MPPI), this will usually start three months after you are made unemployed, and will cover your repayments for 12 months, or possibly longer with some policies.
Homeowners eligible for benefits including Jobseeker’s Allowance, Universal Credit, Pension Credit or income-related Employment and Support Allowance may be able to apply for Support for Mortgage Interest (SMI) payments It’s paid as a loan, and needs to be paid back with interest if you sell or transfer the ownership of your property.
You’ll also need to have been unemployed for more than 39 weeks and your mortgage is less than £200,000. It’s intended to help with interest payments while you’re unemployed, so isn’t designed to handle missed payments and arrears.
As soon as you know your situation is changing, it’s important to speak to your mortgage provider. They may offer options including:
- Moving to an interest-only mortgage
- Extending the term of the mortgage with a reduced monthly payment
- Taking a payment holiday
Paying your mortgage is a priority bill as it ensures you keep a roof over your head. So, if you’re already falling behind, then it’s important to look at the most appropriate debt solutions to prevent court action and your home being repossessed.
This means considering a DMP, or IVA. Bankruptcy can often involve your home being sold to help pay your debts, unless it’s in negative equity, or someone will agree to buy your share of it. To have someone take over your ownership you need to have someone pay the amount you would get if you sold it, after anything secured against it has been taken off (called the beneficial interest). You can’t just sign over your share to someone else, and jointly-owned homes may still be required to be sold if you’re in bankruptcy proceedings.
If you’re renting you may be able to claim Housing Benefit to help with the cost whether you have a public or private sector landlord. If you’re single and under 25, you will usually only get assistance for a bedsit or room in a shared flat, and if you’re living with a partner, only one of you will be able to claim.
As with Universal Credit, savings will be taken into account, so if you have anything above £16,000 tucked away you won’t be eligible. Your rent fees will be compared to the average for your area, and your accommodation may be deemed inappropriate if you’re renting a mansion to live alone, for example.
Redundancy and Debt Management Plans (DMPs)
As a voluntary agreement between you and your creditors, there’s no legal rule against taking out a new Debt Management Plan when you are unemployed. But if you’re surviving solely on benefits, you may find that you can’t offer a reasonable amount as an affordable payment and creditors are much less likely to agree to a DMP.
One benefit of a DMP is that any redundancy money you have received will be treated as income, and not an asset to be immediately handed over to creditors. And this could potentially help with setting up a new arrangement. But you should speak to specialist debt charities and advisers to get help tailored to your individual situation.
A solution if you’re living with a partner or spouse is to use a common household budget with both incomes and expenditures listed. This means if one of you is employed, that income will be contributing to paying off your debts. But as a DMP isn’t marked on their credit file, it won’t affect their score unless you have a joint bank account, joint loan or mortgage, or they’ve guaranteed a loan for you.
If you’re in an existing DMP and made redundant, then it’s important to speak to your provider straight away. They may recommend a payment holiday if you’re likely to find work again soon. As a flexible debt solution, the main option for longer term drops in income is to make reduced payments over a longer period. But your debt adviser may also suggest that there’s a more suitable way to resolve your situation.
A DMP isn’t legally binding, so a creditor might send default notices or sell your debt to a collection agency if you reduce your payments. Ultimately, it doesn’t prevent further enforcement action, which is why you might be advised to switch to a different solution depending on your circumstances. Or you might choose to make a final settlement offer of all, or part, or your debts to end it early.
We’ve created a detailed guide to DMPs to help you see if it’s right for your current situation.
Should you take out a Joint DMP?
You don’t need to take out a Joint DMP to include your partner’s income in setting up or maintaining a debt management plan. As mentioned above, you can simply use a common household budget to set out the affordable repayments, and allow the income of the second person to contribute to the repayments.
If you have joint debts, or you both have individual debts, these can also be rolled together into a joint debt management plan which means you both contribute to a single repayment. You don’t have to be married, as a DMP applies to any cohabiting (in theory, even non-couples living together could be eligible).
It’s always important to remember that it’s possible for a couple to take out different debt solutions individually. Although it’s unusual, it’s possible for one partner to enter into a DMP, and the other to start an IVA. But it’s usually better to either go into insolvency solutions together, or not at all.
Redundancy and Individual Voluntary Arrangements (IVA)
Unlike a DMP, an IVA is a legally binding agreement between you and your creditors, managed by an Insolvency Practitioner (IP). At the end of the set term (usually five or six years), any included debts not paid in full will be written off, and although you may need to release equity from your home, you won’t need to sell it.
If you’re struggling with debts and have been made redundant, then an IVA offers you the potential to have some of the money you owe written off at the end of the agreement. But you should seek expert advice as there are two specific areas of redundancy to take into account.
The first is whether you can get an IVA after you’ve been made unemployed. There’s no legal restriction against being able to set up a new IVA if you’re recently redundant or long-term unemployed and claiming benefits. But it will depend on your income and personal circumstances, as you need to have a reasonable amount to pay towards your debts.
If you can’t afford to easily repay around £80-£100 each month, and don’t have a lump sum from redundancy or the potential sale of assets, then you probably won’t get the agreement required from the majority of your creditors. One option is if a third party (e.g. family or friend) would be willing to contribute to your IVA repayments, which would need to be discussed with the Insolvency Practitioner managing your arrangement.
The second key factor in deciding whether to enter into an IVA will be if you’re about to be made redundant and receive redundancy pay. If you’re in an existing IVA, then some of your payment may be taken and used to pay creditors as outlined below. So you may be better off using any available payment holidays, making partial or token payments, or entering into a DMP in the short term, and then switching to an IVA in the future.
How an IVA is managed will be governed by the IVA Protocol, published by the UK Government Insolvency Service. If you are made redundant and entered into an IVA before October 2016, your supervisor is able to let you have a payment break for up to 6 months. For an IVA started after October 2016, your IP can choose to allow a payment break for up to 9 months. In both cases, this doesn’t require your creditors to agree.
If you’re made redundant during an IVA, you could also have your payments reduced by up to 15% without having to get a new agreement with your creditors. If this isn’t enough to help you cope, then your IP would need to seek a variation to the original terms of your IVA, and this means you will need to have the agreement of the majority of your creditors to a new monthly repayment amount.
Any payment holiday or reductions may mean the length of your IVA will be extended by a maximum of 12 months, unless you can make up the shortfall in the meantime.
As a legal arrangement, you have responsibilities if you are made redundant while in an IVA:
- You must inform your supervisor within 14 days of notice of redundancy, regardless whether you have, or will, receive any redundancy payments.
- If your redundancy payment exceeds 6 months net take home pay (as set out in your last annual IVA review), any excess needs to be paid to your IVA supervisor within 14 days of receipt. (Due to coronavirus, this is at the discretion of your supervisor)
- When you start a new job, it’s expected that any remaining redundancy funds will be paid into the IVA.
You can see more information in our guide to IVAs.
If you’re near to the end of your IVA, you may wish to offer an early settlement via your IP. This could be part, or all of the money owed in your IVA. Your creditors will already be entitled to any redundancy payment above 6 months net pay, so this would need to come from other sources (friends or family, or other credit).
If you think you are likely to be made redundant in the future, it will often be better to look into a DMP as a more flexible and temporary solution. You can always switch to an IVA once you know if you’re actually made redundant, what your redundancy pay will be, and whether you’re struggling to find a new job.
Should you take out a Joint IVA?
It’s only possible to take out an individual IVA. But if you and your partner both want to set up an IVA, they can be linked or ‘interlocking’, which means they’re administered together and you make one joint payment.
Using joint incomes and debt information can mean you may be able to qualify where it would be unviable individually. This can include if one of you has no income, or if the separate debt levels would be too low unless they’re combined. And it also means joint debts can be fully included.
The downside is that an IVA will be recorded on both of your credit histories, and it will lower your credit scores significantly. And you will both have your details recorded on the Individual Insolvency Register. This can have an effect on specific careers, so you need to check our guide to IVAs, and with specialist debt advisers and organisations to see if it might be suitable for your circumstances.
Partners can also opt for different insolvency options, such as mixing an IVA with a Debt Relief Order or bankruptcy.
Redundancy and Debt Relief Orders or Bankruptcy
Bankruptcy and Debt Relief Orders (DROs) are both methods of clearing your debts in a relatively short period of time (usually 12 months). A DRO is a lower cost option for those with relatively low levels of debt, income and assets available in England, Wales and Northern Ireland (in Scotland, the Minimal Assets Process is a similar solution). Whereas bankruptcy deals with debts of more than £5,000.
Both have detailed rules regarding eligibility, the processes involved, and what restrictions are placed on you during, and after the 12-month period. As a result, it’s important to take a look at our guides to DRO and bankruptcy, and also to get specialist advice from debt organisations before pursuing either of them.
If you want to take out a DRO but suspect you may become redundant, you should work out how much any redundancy payment may be. If it’s an amount of between £1,000 and £1,990 then it’s possible your DRO could be revoked, and it’s more likely if the lump sum is over £1,990. So, you would be better to wait until after your redundancy, and use token payments or a DMP in the meantime.
During a DRO, you will need to contact the official receiver immediately if your circumstances change. Whether redundancy pay will revoke your DRO will depend on their decision. And if you’re not able to make the specified DRO payments due to unemployment, then they may be reduced to £1 or even zero, as you’re only required to make payments if you have some disposable income.
Bankruptcy is available whether you’re in work or unemployed. You will only be required to contribute any disposable income, so if you’re surviving on benefits, then you are unlikely to be asked to make further payments to your debts.
You will need to still pay the full bankruptcy application fee of £680 before the process can begin. It’s possible to wait and use redundancy money, or potentially sell an asset which would be claimed as part of your bankruptcy anyway. For example, if you have a car worth more than £1,000.
If you’re in the bankruptcy period and made redundant then you need to let the official receiver know immediately about your change in circumstances. If your last day of employment was before you declared bankruptcy, any redundancy money will be treated as an asset belonging to the official receiver.
When you’re made redundant after the bankruptcy period has ended, but before you’ve been officially discharged, any payment will be treated as an “after-acquired asset” which will be paid to you via the official receiver. But if the last day of employment is after you’ve been discharged from bankruptcy, then any redundancy can be paid straight to you.
For most people, the biggest fear of bankruptcy will be losing your family home if you own your house or have a mortgage. One way to avoid this is to have someone else buy your share at a fair market value. It also won’t be sold if your home is in negative equity and the value of your share is less than £1000, or if the official receiver hasn’t taken action within three years of your bankruptcy order being issued.
If you’re renting, it’s unlikely that you will have to leave unless your tenancy agreement explicitly states a bankrupt person cannot be a tenant.
As with an IVA, it may be worth offering token payments or a DMP if you plan on using bankruptcy or a DRO in the future, but might be made redundant and receive a reasonable payout in the meantime.
Staying positive when faced with debts and redundancy
When you’re dealing with any problem debts, particularly if you’re also coping with redundancy and unemployment, it’s important to stay focused on the positives. There is a range of support available for the pressure on your mental and physical health (we have a guide to the health impact of debts, and how to declare your potential vulnerable to receive more care and consideration from creditors). And there are options to help you keep things under control while you look for work, or to remove debts after a set period.
It may seem tough at the time, but the path to financial freedom starts with taking the first steps. Which means using tools like the DebtBuffer letter templates to gain 30 days of breathing space from creditors while you organise a repayment plan, securing vulnerable status, and speaking with specialist debt organisations and advisers about the solutions available to you.
While you may be tempted to try and hide your financial problems, it’s also important to talk with partners, family and friends for support. And your choice of debt solution could impact joint finances, assets and the household budget. So, explaining the need to cut back on spending or avoiding taking on more credit will be easier the earlier you do it.
Creditors, DMP providers, Insolvency Practitioners and Official Receivers will all have dealt with people who are redundant or unemployed. You’ll find they’re often more understanding about your situation than you might imagine, and the more you show willingness to help them recoup some, or all, of the money owed, the more understanding they’re likely to be.
The less you’re stressed and pressured by debts, the more you can focus on finding a new job. And getting yourself moving towards being debt free.