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What happens to my debts if I lose my job?

Losing your job can be a stressful enough time for you without having the extra worry of how to cope with your debt repayment commitments. If you are left without an income and have to think about how to manage your mortgage or rent payments as well as your everyday bills and living costs then this is more than enough to occupy your time. And, if you’re lucky you may be able to ask for government help with keeping your mortgage lender happy and claim benefits to give you some money for essentials.

But, if you have any other kinds of debts then you have more to worry about. You can’t expect any help from the state with debts such as credit cards, loans and overdrafts, for example. This is something you’ll have to deal with on your own. So, what are your options? Is there a way you can keep servicing your debts even when you’ve lost your job?

In some cases this might not actually be an issue for you. If, for example, you took out some form of credit insurance when you applied for these products in the first place then you may well find that your insurance company will pay your debts for you if you cannot do so through job loss. The most common type of policy here is known as PPI (Payment Protection Insurance).

Here your insurance policy buys you a commitment from an insurer that they will pick up the slack if you lose your income for a variety of reasons including job loss. These kinds of policy can be used to protect a variety of financial products including your:
  • Mortgage.

  • Loans (both secured and unsecured).

  • Credit cards and store cards.

Or, as an alternative you can look at taking out general income protection insurance – this kind of policy will pay you a replacement income for a specific period after you lose your job. You may well be able to keep your debts ticking over with this kind of payment.

But, these kinds of policies can work out to be expensive and many of us don’t take them out as we either can’t afford them or think that we won’t use them. Some people also won’t actually qualify for help here so that is another reason why they often aren’t taken up.

You need to think carefully about what will happen to your debts if you cannot repay them/cover them with insurance. So, for example, you may experience the following:
  • Mortgages: if you cannot pay your mortgage, do not have payment protection insurance and don’t qualify for help from the state then you’re on your own. If you default on your agreement then your lender could repossess your home although do be aware that this is a last resort for most lenders. Here you need to think about talking to your lender to explain your situation and to try and find a solution.

  • Loans: again, if you don’t have an insurance policy covering your loan then you will be liable for the payments even if you lose your job. If a loan is secured against your home then this could see your home repossessed to get the lender’s money back. Again, this is not something that lenders tend to do lightly. If a loan is unsecured then your creditor can take you to court to have a CCJ levied against you to force you to repay. As with mortgage payments you may find it easier to simply talk to your lender first to see what alternative action you could take.

  • Credit Cards: credit cards are unsecured finance so, without insurance and the ability to pay your way here, you could be taken to court. It is again better here to talk to your credit card company as soon as you know that you may have problems making your payments. Many will work with you (or your debt management advisor) to come to some form of compromise.

The key thing to remember in all cases – if you do not have insurance/the income to carry on making repayments after you lose your job – is that you should be talking to lenders as early as you can, ideally before you start having problems. Missing payments and defaulting on them will, at the very least, tarnish your credit record and could have more serious consequences. Lenders are being encouraged to be reasonable here by the government so they may well be able to help you out.
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