How to avoid debt after an unexpected job loss

Last month, over 31,000 jobs were lost across Canada, which saw the biggest monthly drop in full-time work in almost five years. Some 42,000 jobs were cut in the public sector, where many employees have also been experiencing problems with a new pay system, leading to reduced or missing wages. And in Alberta, the unemployment rate reached 8.6 per cent, its highest level since 1994.

These job loss statistics were unexpected by economists, who had been predicting that Canada would actually add 10,000 new jobs in July. Likewise, the loss of a job is often unexpected by individuals, who don’t always have the necessary cash reserves to cope. Unexpected life events, including sudden unemployment, can potentially lead to increased debt, but here are some actions you can take to avoid taking on more debt when faced with an unexpected job loss.

  1. Take a proactive approach to pay off debt

It’s best not to wait until you feel your job might be in jeopardy before starting to reduce your debt load. While you are gainfully employed, you should make a plan to pay off your debts ahead of an unexpected job loss. There are a few strategies that can help you choose and prioritize which debts to pay off first, including the debt snowball and the debt avalanche.

  1. Build up an emergency fund

We believe that paying off debt should be a financial priority for Canadians. However, it’s also important to set aside money for savings, including an emergency fund. If you are able to set aside somewhere between three and six months’ worth of income, you should have enough money to cover your expenses after a sudden job loss. Again, it’s best to start saving when you’re on solid financial footing; even as little as 50 to 100 dollars a month can add up over time.

  1. Stress test your budget

How would your budget cope if your earnings suddenly dropped by 50 per cent? Could you still make ends meet on a reduced income? Whether you use a spreadsheet or an online tool like the FCAC’s budget calculator, you can easily “stress test” your budget by adjusting your monthly income level. This should give you an idea of where you might have to trim your spending if you’re faced with a loss of income.

  1. Reduce your expenses

If you’ve lost your job, you will need to reduce your expenses as much and as soon as possible in order to keep up with your monthly debt payments. Some monthly bills, like a mortgage or car loan, likely can’t be reduced, but on the other hand, there are ways you can trim spending on your grocery, hydro and cable bills—or even consider cutting the cord altogether, at least for a few months.

  1. Lower your interest rates

With certain creditors, particularly credit card companies, you might be able to negotiate a lower interest rate on your debt. If you’ve been keeping up with your minimum payments, and are currently experiencing some hardship, calmly explaining your situation and asking for a rate reduction could potentially work in your favour.

  1. Speak with a licensed debt help professional

If you have recently lost your job, and you find your debt is becoming unmanageable, it would be a good idea to seek help from a licensed professional. A Licensed Insolvency Trustee will listen carefully as you describe your situation, and explain every option available to help you find the best solution to manage your debt.

Were you surprised by the latest unemployment statistics? Join the conversation on Twitter using the hashtags #BDOdebtrelief #LetsTalkDebt