Job Loss, Reduced Income, and Debt: What to Do When You Can No Longer Pay?

A job loss, a pay cut or time off work can quickly throw a budget off balance. When your income drops, credit card payments, personal loans and lines of credit can become hard to keep up with.

If you can no longer pay your debts after a loss of income, the first step is to review your budget, prioritize your essential expenses and look at the possible solutions before missed payments start piling up.

Depending on your situation, an arrangement with your creditors, debt consolidation, a consumer proposal or another solution could be considered.

You don’t necessarily have to declare bankruptcy because you lost your job or your income went down. What matters is understanding your real ability to repay and choosing a solution that fits your financial situation.

 

Why Can Reduced Income Make Debt Hard to Manage?

Reduced income can make debt hard to manage because your monthly payments often stay the same while your ability to repay goes down.

For example, if you were earning $3,500 a month and your income dropped to $2,200 after losing your job, you need to find a way to cover the $1,300 gap.

Several factors can then weaken your financial situation:

• Fixed payments keep coming: personal loans, car loans and minimum credit card payments still have to be paid, even when you are unemployed or off work.
• Interest keeps adding up: if you only repay a small portion of your debts, interest can eat up a large share of your payments. Your balance then goes down slowly, and can even go up if new charges exceed the amounts you repay.
• Essential expenses come first: housing, groceries, electricity, medication and essential transportation all have to be included in your budget. Sometimes there is too little money left to meet all your financial obligations.
• Credit becomes a way to cover everyday expenses: you might be tempted to use your credit card to pay for groceries, gas or other day-to-day expenses. This can help in the short term, but it can make your debt worse if your income doesn’t recover quickly.

Reduced income therefore doesn’t automatically mean you are managing your money poorly. It can simply make it impossible to maintain a budget that was built for a different financial situation.

What Are the Signs Your Budget No Longer Works After a Loss of Income?

Your budget becomes hard to sustain when you have to use credit to pay for everyday expenses, when you fall behind on payments or when you can no longer make your minimum payments.

Certain signs show it’s time to review your financial situation:

• You only pay the minimum amounts on your credit cards;
• You use a credit card to buy food or pay for gas;
• You delay some bills in order to pay others;
• You borrow money to repay another debt;
• Your bank account is often overdrawn;
• You receive calls from creditors or collection notices;
• You no longer have money set aside for unexpected expenses;
• You no longer know which bills to pay first.

When several of these problems show up at the same time, you need to take a careful look at your budget and determine whether your available income will actually allow you to repay your debts.

For example, a person loses their job and starts receiving Employment Insurance (EI) benefits. Their income goes down, but they keep paying the same monthly amounts on their debts.

They then use their line of credit to cover everyday expenses. After a few months, the line of credit is almost maxed out and the credit cards are just as full, if not more. At that point, the problem is no longer just this month’s bills. There is too much debt for their ability to repay.

 

What to Do If You Can No Longer Pay Your Debts After a Job Loss?

If you can no longer pay your debts, start by analyzing your finances, protect your ability to cover your essential needs and look at your options before your debt grows any further:

1. List Your Income and Expenses

Figure out how much money actually comes into your account each month and how much you need to spend to live (essential expenses).

Write down your current income: your salary or Employment Insurance benefits, any benefits you may be entitled to and any other sources of income available.

Then list your monthly expenses: housing, groceries, electricity, phone, insurance, transportation, medication and other necessary family expenses. Add your minimum payments on credit cards, personal loans and lines of credit.

Also note any overdue debts, interest rates and due dates.

This exercise will help you answer a key question: after paying your necessary expenses, how much do you really have left to repay your debts?

If the amount available is not enough, you need to look for longer-term solutions instead of trying to keep going with a budget that no longer matches your means.

 

2. Prioritize Essential Expenses

When your income goes down, not every bill can necessarily be paid in full. You then need to assess the possible consequences of each late payment and make sure your basic needs are met.

Housing, food, electricity, medication and essential transportation deserve particular attention. Other essential family expenses (daycare, etc.) also need to be taken into account.

This doesn’t mean credit card debt or personal loans can be ignored without consequences. Late payments can lead to fees, affect your credit report and result in collection measures by your creditors.

Above all, avoid neglecting your essential needs just to make payments that are no longer compatible with your financial capacity.

Read our article on the essential expenses to prioritize when you have debt.

 

3. Avoid Using Credit to Fill the Gap

Using a credit card or line of credit can seem like the easiest way to get through a few difficult weeks. But this strategy becomes risky when the drop in income drags on.

Let’s say you put an extra $500 a month on your credit card to cover everyday expenses. After six months, you will have added $3,000 to your balance, not counting interest and any fees.

If your income still hasn’t gone up, you will have to repay this new debt with a budget that was already too tight.

Before taking out a new loan (payday loan or otherwise), ask yourself whether you will really have the money needed to repay it. If not, it may be better to look at other options.

 

4. Contact Your Creditors When Appropriate

Depending on your financial situation and the type of debts you have, it could be helpful to contact your creditors to explain your drop in income and find out whether temporary arrangements are possible.

Some lenders may change the payment terms or offer you other arrangements. What’s possible varies depending on the contract, the creditor and your file.

But don’t assume a payment can be put on hold at no cost or without consequences. Ask for the conditions to be clearly explained before agreeing to an arrangement.

If several creditors are demanding payments you can no longer make, an overall analysis of your situation could help you determine whether an arrangement is enough or whether a solution administered by a Licensed Insolvency Trustee would be more appropriate.

 

5. Get a Professional Analysis of Your Situation

When your debts exceed your ability to repay, a Licensed Insolvency Trustee can review your situation and explain the solutions available under Canadian law.

The analysis will take into account your income, your expenses, the amount of your debts, your assets and your ability to repay.

A free consultation helps you better understand the solutions: debt consolidation, consumer proposal and personal bankruptcy. It also helps determine whether a given solution is realistic in your current situation.

 

Can Debt Consolidation Help After a Drop in Income?

Debt consolidation can make repayment easier by combining several debts into a single loan, but whether you qualify for financing depends on your ability to make the new payments.

This solution can be worthwhile if you have several credit cards or personal loans with high interest rates.

By combining your balances, you could get a lower interest rate and a monthly payment that is easier to manage. But this depends on the terms of the new loan, its length and the applicable fees.

A drop in income can make it harder to get a consolidation loan. The lender has to assess your ability to repay and may turn down your application if your financial situation is considered too fragile.

Even if you get a consolidation loan, you will need to avoid using your credit cards again. Without changes to your spending habits or your budget, you could end up with new debt.

Consolidation is therefore not automatically the best solution after a loss of income. You need to compare its total cost and terms with the other solutions available.

 

When Should You Consider a Consumer Proposal?

A consumer proposal can be considered when your unsecured debts have become too difficult to repay and you would prefer a solution other than bankruptcy.

It is a procedure provided for under the Bankruptcy and Insolvency Act. It allows an eligible person to make a repayment offer to their creditors through a Licensed Insolvency Trustee.

Unlike a simple arrangement with a lender, a consumer proposal allows you to negotiate repaying only part of your eligible debts, based on your financial capacity. And in some cases, you no longer have interest to pay.

 

How Does a Consumer Proposal Work?

The Licensed Insolvency Trustee reviews your financial situation and explains the terms of the proposal. If this option is appropriate, a proposal is prepared and submitted to the creditors involved.

The amount offered and the payment terms depend on your income, your assets, your debts and the circumstances that led to your over-indebtedness. Creditors must accept (or reject) the proposal in accordance with the applicable rules.

Once accepted, the proposal sets out monthly payments on a schedule that can last up to five years.

This solution can be useful if you have a stable income that allows you to make payments, but not to repay your debts under the current terms.

Keep in mind that a proposal does not automatically lead to a reduction of your debts. It depends on each situation.

To better understand this procedure, see our page on the consumer proposal.

 

Is a Consumer Proposal Possible While Unemployed?

Receiving Employment Insurance benefits does not automatically prevent you from considering a consumer proposal.

The key question is whether your financial situation will allow you to meet the proposed terms. The amount and duration of your benefits, your essential expenses, your other income and your debts all need to be taken into account.

If your situation is temporary and you expect to return to work soon, other solutions could also be relevant.

An analysis of your situation by a Licensed Insolvency Trustee will help determine whether a consumer proposal is realistic or whether another option should be considered.

 

Is Bankruptcy the Only Option If You Lost Your Income?

No. A job loss or a pay cut doesn’t automatically mean you have to declare bankruptcy.

Several options can be considered depending on your level of debt, how long the drop in income is expected to last and your ability to make repayments.

An arrangement with your creditors is sometimes enough. Debt consolidation may also be possible if you qualify for financing. And a consumer proposal may suit some people whose debts have become too heavy but who still have a stable income.

Personal bankruptcy is a legal procedure that can offer a fresh start in certain circumstances. However, it comes with consequences and obligations that should be explained before you make a decision.

The choice will depend on your overall financial situation, not only on your job loss or drop in income. Your income, your assets, your obligations and the possible consequences of each solution all need to be considered.

A Licensed Insolvency Trustee can present the options that apply to you and help you understand what they involve.

 

Why Seek Advice Quickly After a Loss or Drop in Income?

Seeking advice quickly lets you assess the possible solutions before late payments, interest and collection measures make your situation even more complicated.

When payments become difficult to make, it can be tempting to wait until your financial situation stabilizes. However, if the budget shortfall happens again every month, your debt is likely to keep growing.

An analysis by a Licensed Insolvency Trustee can help you:

• determine which essential expenses should come first;
• understand the consequences of late payments;
• assess your real ability to repay;
• compare the options that would allow you to repay your debts;
• find out whether a consumer proposal or another procedure could be right for you;
• build a plan suited to your current income.

Better understanding your situation can help you make more informed decisions. The consultation comes with no obligation on your part.

If you have already received collection notices or you are worried your creditors may seek a wage garnishment, it is well worth getting advice.

 

FAQ

What should I do if I lost my job and can no longer pay my debts?

Start by calculating your current income, your essential expenses and the minimum monthly payments you need to make on your debts.

Avoid taking out more loans to cover a shortfall. If you can no longer meet your financial obligations, consult a Licensed Insolvency Trustee to review the solutions available to you.

 

Do I have to keep paying my credit cards if my income has dropped?

Payments must still be made even after a job loss or a drop in income. If you can no longer pay the required minimum amounts, assess the possible consequences and the options available with your creditors or with a Licensed Insolvency Trustee.

You need to cover your essential needs while understanding the consequences of late payments.

 

Is debt consolidation possible after a loss of income?

Yes, in some cases, but your approval depends on your income, your credit report and your ability to repay.

If your financial situation doesn’t allow you to get a new loan, other solutions can be considered.

 

Can a consumer proposal help me if I’m unemployed?

It can be considered if you are eligible and a realistic repayment offer can be put together. The Licensed Insolvency Trustee will assess your available income, your expenses, your assets and your debts.

 

Do I have to declare bankruptcy if I can no longer pay my debts?

No. Bankruptcy is not automatic when a person loses their job or their income goes down. An arrangement with creditors, debt consolidation or a consumer proposal can sometimes be considered, depending on the circumstances.

 

When should I consult a Licensed Insolvency Trustee?

You can seek advice as soon as your payments become difficult to make, you regularly use credit for everyday expenses or your debts keep growing despite your repayments.

A consultation helps you better understand your options before making a decision.

 

A Drop in Income Can Happen, but There Are Solutions

A job loss, an illness or reduced work hours can upend a financial situation in just a few weeks.

When your income is no longer enough to cover everyday expenses and debts, it is important to analyze your budget and assess the solutions available.

You don’t have to wait until all your payments are late to ask for help. An analysis of your situation can help you better understand your obligations, your ability to repay and the options that could meet your needs.

 

Book a Free Call

If a job loss or drop in income is making your debt payments hard to keep up with, book a free consultation with Gobeil Syndic.

You’ll be able to take stock of your income and debts, and discover the possible solutions with a Licensed Insolvency Trustee.

You can then make an informed decision based on your financial situation.