How should I prepare for a short term unemployment period?

September 20, 2006 4:32 PM

I am a professional person and will be "downsized" from my current company next month. Since I am changing professions in the meantime, it may take 4 to 6 months to secure my next place of employment. Financial resources are my concern. I have 6 months of mortgage payments saved up, and no other debt beyond monthly utilities, cable, internet, etc. I do have savings I can draw from, and I am considering applying for state unemployment benefits. I may get a small severance package from the current employer. Would it be wise to seek a line of credit while I'm still employed? Would this put my house in jeopardy should it take longer to find work? Are there other resources I should consider?

One other question that's on my mind: If I am approved for state unemployment (in Ohio), would I still be eligible to work freelance part-time? Any guidance would be greatly appreciated.

posted by anonymous to work & money (11 answers total)

Regarding state unemployment benefits. I'm not sure how it works in Ohio, but in WA, last I looked (a few years ago), any income you earn in a given week while you are on unemployment will be deducted from whatever benefits you would ordinarily receive that week.
posted by Good Brain at 4:51 PM on September 20, 2006

If you think you'll need a line of credit during the time you're unemployed, I would think it'd be better to apply for it before you're out of work. Hopefully your credit rating is good?

However, if you get one, plan to not use it. It's good to have for emergencies, but it should be limited to that, or you'll find yourself in serious debt in no time. Make it your goal to get through this without using a credit card at all, if possible.

Between the saved-up mortgage payments, your other savings, and unemployment, you'll probably be OK. Not up to the same standard of living, maybe (prepare to eat cheaper), but OK.
posted by CrayDrygu at 4:57 PM on September 20, 2006

As a homeowner you are probably getting solicited for credit cards all the time. I would advise getting a credit card with a 0% introductory APR using one of the offers for same you received this week. Put all your expenses on that and make the minimum payment from your unemployment (yes, you should apply for unemployment benefits -- your company pays for it, it's a benefit you are entitled to). I just got a card from Chase that has no interest through April 2008, and my credit isn't even all that great. Bank the rest of the unemployment rather than spending it (put it in a high-interest savings account that pays at least 5%). If the credit limit you get won't carry you over during the time you expect to be unemployed, get more cards. Don't forget to set up automatic minimum payments through the bank's Web site so you can't forget to make a payment.

Now this does have some dangers, such as, what happens if you can't find new work, or it pays significantly less, such that you can't pay off the debt before the promo 0% rate runs out? Well, in the case of the Chase card I got, the "regular" rate is fixed at 8.99%, which isn't too terribly onerous. Your mileage may vary. But really, if you can't find work, you're financially scrod anyway. You'll have some of your unemployment saved up, which will help.

The advantage of using a credit card rather than getting a home equity line of credit is that the HELOC does indeed put your home in jeopardy. It's a secured loan and they can foreclose on your house if you don't pay as agreed. The credit card's unsecured and all they can do is sue you for it if you can't pay. Worse comes to worst, you can get on a payment plan through a debt counselor to slash the interest rate and lower the payments, and you still get to keep your house. (Your credit will be shot, however.)
posted by kindall at 4:59 PM on September 20, 2006

Oh, don't forget you'll have to pay income tax on your unemployment benefits.
posted by kindall at 5:00 PM on September 20, 2006

Apply for a regular line of credit, not one tied to your home. I mean, you could have both, but it's nice to have one that isn't tied to your home. The interest rate is a little higher, but, if you're not *planning* to use one anyway, it's moot.
posted by acoutu at 5:36 PM on September 20, 2006

Absolutely apply for unemployment benefits. Freelance income reduces benefits, so try to plan your work in clumps, if you can, but it's still better to be working, and it might extend your eligibility period. Go visit the unemployment office. Check on how they calculate your severance. In Maine, getting all the severance and vacation time in the last paycheck, and getting that paycheck on the last workday means unemployment starts sooner. My idiot former employer couldn't get their act together to do that, which has something to do with why they tanked.

A line of credit on the house does put your house at risk, but might get you through a rough patch between the end of your savings and your 1st check at a new job. If you have savings, you're probably pretty good at being financially conservative. A credit card could be a good idea as long as you read the fine print carefully. Consider a roommate while you're unemployed. And enjoy some time off; it can be a gift.
posted by theora55 at 6:12 PM on September 20, 2006

Absolutely apply for unemployment!!!! It would be utter insanity not to, and live completely off your hard-earned savings! And since you're being downsized you should be a shoo-in to get it; while not lucrative, the UI benefits should ensure you'll get enough to cover bills and expenses without dipping into your savings at all- it sounds like you haven't developed spendy habits, which is a good thing.

You can also apply for UI proactively- as in, apply for it now if you know you're being downsized at a certain date, so that you don't even lose a week after you're formally laid off while they process you. And in WA state at least, while you owe [federal] taxes on your UI, you don't have to have them deducted from the initial check, if you feel confident you'll be able to pay for the taxes out-of-pocket when tax time rolls around.

Any freelance work you get will be deducted from your UI benefits, but that's a quality problem to have: UI means that you don't have to touch that savings, or at least not very much of it, to pay for your recurring expenses until you get settled into full time work; by definition, if you make more in a week doing freelance, you won't get your UI but what do you care? In either case, you are able to cover your cost of living. I was on UI for a few months after losing a dot-com job back in 2001; I live thriftily enough that I still saved money on UI, without changing my lifestyle, and that meant I could look for work without stressing about making rent.
posted by hincandenza at 7:47 PM on September 20, 2006

Also in WA, you potentially lose only a PORTION of your weekly Unemployment Insurance benefits if you bring in freelance income...the forumula is hard (for me) to express, but I'm currently getting maximum UI benefits ($446/week after taxes), recently brought in $390 one week in freelance income, and still had nearly $200 in UI benefits that week. The less you take out of your UI account, the longer it lasts. Circumstances may be different in your state, but you absolutely should apply for UI. Your employer has already paid for it, you're eligible for it, and around here at least, meeting the eligibility requirements isn't that tough.
posted by lhauser at 7:45 AM on September 21, 2006

In some states your unemployment benefits MAY NOT be affected by part-time work or receipt of severance pay, nor the timing of your last paycheck. Many states have online information about factors affecting eligibility and offsets.

I cannot speak for Ohio.
posted by mikewas at 11:08 AM on September 21, 2006

and I am considering applying for state unemployment benefits

If I find out that you failed to apply for them I will come to your house and beat you even sillier. You pay into that system and you have no choice but to pay into that system. Unlike car insurance where you might suffer higher premiums for filing a claim there is no downside to collecting on UI. Collect!

If you have been conditioned by the insane to think of it (wrongly) as welfare, consider this: In all the time you have been employed you could have been saving that money that they took from you and self-insuring. You were not allowed that opportunity. Take the only one you are allowed.
posted by phearlez at 2:15 PM on September 21, 2006

Well said, phearlez. I wish someone had given me similiarly sage advice a few years ago.

I didn't collect and it probably just went to fund some dumbass thing like Israeli bulldozers or killing wild donkeys.
posted by codswallop at 4:23 PM on September 21, 2006