SAN JOSE, Calif.--(BUSINESS WIRE)--Losing a job can be an incredibly stressful experience, especially if you don't have another job lined up. If your financial situation is uncertain due to a layoff, here are some steps you can take to mitigate some of the damage to your financial health as you work on finding a new job, from myFICO.
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1. Sign up for COBRA or Short-Term Coverage
The Consolidated Omnibus Budget Reconciliation Act (COBRA) was enacted in 1985 and provides workers and their families with an opportunity to continue health insurance coverage for a limited period after certain events, including voluntary or involuntary job loss.
Unfortunately, COBRA coverage can be expensive, with employers allowed to charge up to 102% of the cost of the plan. But if you have chronic medical issues or you're worried about losing coverage, it could save you money in the long run.
If you can't afford the cost of COBRA coverage, you could consider short-term health insurance coverage. Depending on where you live, you could get a policy for anywhere between one and up to 12 months, and you can choose coverage levels that make sense for you.
2. Apply for Unemployment Benefits
Unemployment insurance benefits and requirements to qualify can vary by state. But if you've lost your job through no fault of your own, you may be able to get enough coverage to meet your basic financial needs.
Contact your state's unemployment insurance office to learn more about your options and eligibility requirements.
3. Consider a Hardship Withdrawal from Your 401(k)
The hardship distribution rule allows you to take money from a 401(k) account if you're experiencing an immediate and heavy financial need and you only take out the amount necessary to satisfy that need.
While a job loss on its own doesn't qualify you for a hardship withdrawal, you may be eligible if your loss of employment results in other issues, such as certain medical expenses, possible eviction or foreclosure, funeral costs and more.
Just keep in mind that a hardship distribution does not spare you from being taxed on the amount you withdraw that wasn't previously taxed. You may also incur a 10% penalty from the IRS. But if you have a sizable 401(k) balance or your credit needs some work, it could be a better alternative to trying to borrow money with a credit card or high-interest loan.
4. Contact Lenders About Forbearance Options
Regardless of the type of debt you have, you may be able to ask your lenders to pause your monthly payments for a time, giving you some breathing room while you get back on your feet financially.
Of course, availability and length of forbearance can vary based on the type of loan you have and your lender's policies. Also, some lenders may require you to make the payment you skipped once your forbearance period ends, while others may tack it onto the end of your repayment term. But even if you only get a break for a month or two, it could give you enough time to find a new job and get caught up.
5. Consider Ways to Reduce Your Expenses
Take a look at your budget and look for opportunities to pare back your spending while you look for a new job. If you have some flexibility with rent, for instance, you could consider having a roommate move in with you or vice versa, or even moving in with parents or other loved ones.
You can also look at other areas of your budget, including eating out, streaming subscriptions, grocery shopping and other spending categories, and set goals to limit your expenses.
6. Give Yourself Some Grace with Debt
Even with your best efforts, you may need to rely on credit cards and other debt to make it through to your next paycheck. If this happens, resist the urge to beat yourself up about it.
While it's not ideal to take on high-interest debt, missing important payments because you're putting your money toward other necessities could have a much greater impact on your financial wellness, and for a longer time.
7. Monitor Your FICO® Scores
Your FICO® Score is dynamic, so while you may see it fall if you miss a payment or rack up a large balance, it won't stay that way forever. While you may not be able to prevent damage to your score, it's important to keep an eye on it throughout the process to understand how certain actions influence your FICO Score.
Checking your FICO® Scores regularly can also help you spot issues that you can address, so you can avoid further damage.
The Bottom Line
Getting laid off can be a traumatic experience, but there are some steps you can take to safeguard your financial health while you look for another job. As you consider these and other tips, tailor what you find to your situation and needs, and don't be afraid to switch up your strategy over time, particularly if your unemployment extends beyond what you expected.
Get your FICO® Score from the people that make the FICO Scores, for free. Plus, free Equifax credit monitoring and a free Equifax credit report every month. No credit card required. For more information, visit https://www.myfico.com/products/fico-free-plan-a.