A reader asks:
Help! I have just been made redundant and I don’t know how I am going manage, especially as we have debts. I’m only getting a few weeks redundancy pay. What should I do?
A lot of firms are closing or making some staff redundant because of Coronavirus.
If your firm has just closed suddenly, you may be worried about getting the pay for the weeks you have already worked, the pay for holidays you haven’t taken, the notice period you should have had and redundancy pay if you had been there more than two years. Your local Citizens Advice can help to understand what you should get.
If you don’t get paid all these, you may be able to claim for them through the government’s Insolvency Service. See this page which lets you start a claim and has the helpline number.
The 4 steps to take
Unless you know you can easily get another job, your top priority has to be to stabilise your finances whilst you look for work.
It is important that you don’t delay starting with this. A few weeks feeling depressed followed by a few weeks starting to make job applications will run through almost all your savings.
Benefits take time to be processed, so get those applications going, don’t wait until you have actually run out of money.
You are going to need the redundancy money to live on – for priorities such as food, bills and housing – not for paying off debts. So here are the four steps to take.
1. Look for easy ways to reduce your expenditure?
The less you spend on non-essentials now, the longer your redundancy money is going to last. When you get another job you can start spending again, but for now, think of yourself as being on a “war footing”.
For many people, food spending, eating out and takeaways are one of the easiest places to make large reductions. Look at stopping charity donations, Sky, gym membership, Spotify, magazine subscriptions etc. Many people’s spending patterns changed significantly during lockdown – could you go back to something similar for a few months?
Also look at whether there are any other simple things to do to improve your finances. The one thing you suddenly have more of is time, so check out all the ideas in this financial review program.
2. Benefits whilst you are out of work
Benefits depend on how much National Insurance contributions you have paid and on your household income. Turn 2 Us has a good online benefit checker.
As a rough guide:
- If there is little or no money coming into your household, many people should apply for Universal Credit (UC).
- UC has an element that helps cover your rent – this replaces Housing Benefit if you were getting that before.
- UC also has an element that covers children’s costs, so it replaces Child Tax Credit.
- If you have paid enough National Insurance you will be entitled to New Style Job Seekers Allowance for six months even if you have a partner who is earning a lot or a lot of money in the bank.
- If you have a mortgage, you won’t be able to get help with your mortgage costs until you have been on UC for 9 months and during that time neither you nor your partner has earned anything.
- If your household now has a low income, you should be able to get Council Tax Support – apply through your local council’s website.
- Not strictly a benefit, but you may also be entitled to some of the income tax you have paid since April (the start of the tax year) back when you have been unemployed for 4 weeks. See Claiming your tax rebate after losing your job for how to do this.
But your situation may be complex, especially if you or anyone in your family is getting any disability benefits, if you have a redundancy money, or you are currently getting tax credits:
- some people already getting tax credits and housing benefit may be better off not switching to Universal Credit (UC) – if you apply for UC you can never go back to getting the previous benefits again.
- it may be better to apply for new style JSA rather than Universal Credit.
- if you get a large amount of redundancy, it may be better to delay your UC claim until the month after you receive the redundancy pay.
Your local Citizens Advice can help you look at all the options and what to apply for and when to do this.
3. Put your debts on hold
If you have lost your job because of coronavirus, you should find lenders and debt collectors are very sympathetic.
If you are already in a Debt Management Plan, then tell your DMP firm that you have to stop the monthly payments until you get a new job.
In an IVA, talk to the IVA firm immediately about your loss of income and the redundancy pay, see what happens in an IVA when you are made redundant. It is usually easy to get a payment break from your IVA while you look for another job.
For most sorts of debt you can get up to 6 months payment breaks. If you lose your job and haven’t yet used up your 6 months of breaks, it is probably a good idea to take one now while you still can. Interest will carry on being added but these breaks won’t directly harm your credit score. Although it’s possible taking breaks may make it harder to get credit in future, you have a problem now that has to be dealt with!
It’s better to take action on your debts – if you carry on spending on your credit card until it is maxed out, or borrowing to be able to make debt repayments, your situation is getting much worse every month.
Once the payment breaks have ended, you can still ask your lender for help. For unsecured loans, credit cards and catalogues this is easy – you need to ask for a token payment arrangement until you are back in work and for interest to be frozen. For credit cards and catalogues, if interest has been added during payment breaks, this interest should now be removed because you are still in difficulty.
For secured debt this isn’t so simple but your lender still has to provide some help, see:
- When mortgage payment breaks end, can you pay your mortgage?
- Car finance – what help can you get when the payment breaks end?
If you ask Citizens Advice about benefits, also talk to them about your debts as well, so you feel comfortable with how it will work. They can also talk about priority debts – your redundancy money is probably best kept for paying the mortgage/rent, utilities, car finances, not non-priority debts such as credit cards and loans.
4. Start job hunting
Then you can turn to job hunting, hopefully feeling that your finances may not be great but they are under control. You may want to look for some of the temporary jobs available during this Coronavirus time if no-one is recruiting for your normal career.
Tell everyone you know you are in the job market – don’t rely on the Job Centre to come up with ideas for you:
- think about getting a LinkedIn profile;
- smarten up your CV. Get some else to look at it for spelling errors or just how well it reads, perhaps an ex-colleague or boss;
- if you didn’t enjoy your previous job, is this a good time to think about re-training?
Review your debts after a few months
If you are young then it may make sense to delay taking such final decisions, but if you are older, getting a well-paid job may seem unlikely so will you be able to clear your debts before you retire?
Do not start an IVA if your financial situation may change – IVAs are being mis-sold by firms because they get large amounts of fees from them. It may sound great (“write off 80% of your debts!”) but what the IVA firms don’t tell you is that 30% of IVAs were failing even before the pandemic!
- If your finances get worse, your IVA may well fail.
- If they get better you can end up paying back a LOT more then the current total of your debts.
If anyone recommends an IVA to you, put the phone down and talk to either National Debtline on 0808 808 4000 or your local Citizens Advice.
What if you get a large amount of redundancy money?
You may think £5000 is large if you have never had that much money in the bank before. But if you can’t get a job soon, it will be spent quite soon.
Here I am talking about much larger amounts.
Most of the above advice on the four steps applies even if you get a large payout, with two exceptions:
- if you have over £6,000 in the bank means-tested benefits are reduced and over £16,000 you won’t get them at all. This includes Universal Credit and its help with housing costs. But you will still be able to get “new style JSA” for 6 months because you have been paying National Insurance – that isn’t means-tested.
- with a lot of money it is usually sensible to immediately clear any priority debts – rent/mortgage arrears, council tax arrears, utility bills etc.
- if you are claiming Universal Credit it may be a good idea to pay off non-priority debts to get your capital down to 6k. But don’t pay off credit cards if you know you are going to struggle to afford to pay the mortgage.
If your other debts are small compared to the money you have, it may be worth clearing them. So if you get a payout of £12,000 and you have a small loan left and a credit card that add up to only £2,000, then many people would just like them gone. But if the other debts are large, think twice and talk to a debt adviser first – it may be a nice feeling to be debt-free but if it’s going to take months until you find work, you may need that redundancy money to live on.