The Cutting Edge: Managing the Aftermath of a Layoff

Only a month into the new year and employers are axing thousands of jobs almost by the day. On Monday, more than 40,000 jobs were cut from the economy, with Caterpillar cutting 20,000 alone.

For those seeking financial stability after a layoff, aside from unemployment benefits and severance packages, credit cards may also be a means to supplement income. But they should only be used as a last resort.

“It’s difficult to live off of credit cards unless you can see your way out of it,” says Genevia Gee Fulbright, president and certified public accountant at Fulbright & Fulbright. “You don’t want to end up filing for bankruptcy,” she adds.

Cash reserves should always be the first line of defense, says Kevin Davis, a certified financial planner at Consolidated Financial Services.

Other alternatives include taking out a line of credit, and if worse comes to worst, tapping into your 401(k) plan.

You can set up a 72(t) account, which can set up automatic withdrawals from your 401(k) without any penalties, he says.

Here’s how it works: You rollover your 401(k) to an IRA and apply with the IRS for a 72(t). The IRS will set up a distribution method, however, once an income stream is set up, it must continue until age 59 ½ or for a minimum of five years, whichever comes last, which would be a drawback for younger people.

If you really don’t have a choice except to use credit cards, check out these tips on charging wisely:
Compare teaser rates and out-of-work time: If you’re looking for a new card, compare the introductory rates from prospective companies with how long you expect to be out of the workforce.

“If you feel like you can pay the card off in 12 months, do a 0% interest rate [if it is offered],” Davis says. Since the offer only lasts if the balance is paid down by the time the promoti

onal rate ends this may not fit everyone’s needs. If you don’t think the balance can be paid off within the allotted time, opt for a bit of a higher rate that will remain the same so you won’t be surprised by spiraling finance fees once the introductory period is over.

Pay on time: Sure, it’s a given, but does it always happen? One missed or late payment can hike your interest rate to 18% and in some cases even 27%, says Davis. To avoid late payments Davis suggests setup up an automatic payment plan.

Determine necessity: A designer bag or HDTV is not a necessity. Credit cards should only be used to pay for staple items — food, shelter, utilities, etc. “If you lose your job the first thing you should try to do is get your expenses as low as possible. Use credit cards to pay fixed expenses,” Davis says.

Actively manage your debt: Davis recommends using a Microsoft Excel spreadsheet or other software to track your spending. “You need to know you’re building additional debt and hopefully at some point in the future you will be able to pay it off,” he says. Keep in mind that though your cash flow will pick up once back at work, you do have additional debt that you have to pay off.

Exercise caution before claiming economic hardship: Many credit card companies have hardship agreement programs that can create an affordable payment system for you. But lowering your payments this way can negatively impact your credit score, Davis says. This can hurt you when trying to buy a house, car, or even get a job. Make sure the benefits outweigh the costs if deciding on an economic hardship agreement.

Manage your interest rates: If you haven’t called your card company to talk down your interest rates, hop to it! This can be one of the quickest and easiest measures you can take to make your monthly payments more manageable. If that doesn’t work, you may want to consider a balance transfer, says Fulbright.

“Some balance transfers are permanent rates are permanent,” she says, meaning they last until the balance is paid off.

Again, compare any teaser rates with how long you think you may be out of the workforce.  If you’re backed into a corner and the teaser rate is for three or six months, talk to the creditor, let them know I’ve been laid off, can we stretch this?’” Fulbright says.

Tell us your story. Have you had to “live off your credit cards”? How did you pay them off?