I Just Got Laid Off. What Should I Do Next Financially?

Losing a job can be overwhelming, especially when it comes to managing finances. Without a steady paycheck, making informed decisions is crucial to staying afloat while searching for new opportunities. Acting quickly can prevent financial strain from becoming a long-term problem.

The first steps involve assessing available resources, cutting unnecessary expenses, and ensuring essential bills are covered. From severance pay and unemployment benefits to health insurance and debt management, understanding your options will help stabilize your situation.

Severance Packages

A severance package can provide temporary financial relief, but the details vary by company policy, employment contracts, and state laws. Some employers offer a lump sum, while others continue salary payments for a set period. The amount is often based on tenure, with many companies providing one to two weeks of pay per year of service. Reviewing the terms carefully is important, as accepting severance may come with conditions, such as a non-compete agreement or a waiver of legal claims against the employer.

Severance may also include unused vacation pay, bonuses, or stock options. If you had equity in the company, check the vesting schedule to determine if you qualify for any shares. Some companies accelerate vesting upon termination, while others impose conditions. If you received a signing bonus or tuition reimbursement, verify whether repayment is required.

Taxes also impact severance pay. Since it’s considered income, it’s subject to federal and state taxes, as well as FICA payroll taxes. If paid as a lump sum, withholding rules may result in higher tax rates. Requesting a structured payout over multiple months could help manage tax liability, depending on your overall income for the year.

Unemployment Assistance

Filing for unemployment benefits should be a priority after a layoff, as these payments can cover basic expenses. Eligibility and benefit amounts vary by state, but most programs require individuals to have earned a certain amount in wages over the past four to five quarters. The application process typically involves providing employment details, reason for separation, and proof of identity. Ensuring accuracy can prevent delays.

Each state sets its own maximum weekly benefit, generally ranging from $200 to $900. Some states offer higher payouts for claimants with dependents. Benefits typically last up to 26 weeks, though extensions may be available during economic downturns.

Unemployment benefits are taxable at the federal and, in most cases, state level. Claimants can opt for tax withholding to avoid a surprise bill. Additionally, these benefits may affect eligibility for income-based assistance programs like Medicaid or Supplemental Nutrition Assistance Program (SNAP), which consider them as part of total income.

Health Coverage Costs

Losing employer-sponsored health insurance can be a major financial concern. Without coverage, routine medical expenses and emergencies can become costly. Understanding available options can help prevent gaps.

One option is continuing the existing employer-sponsored plan through COBRA, which allows individuals to keep their health insurance for up to 18 months. However, COBRA requires paying the full premium, including the employer’s portion, plus a 2% administrative fee. This can make it significantly more expensive, with average costs exceeding $600 per month for an individual and over $1,700 for a family. Some states extend COBRA benefits beyond the federal limit.

For a more affordable option, the Health Insurance Marketplace offers subsidized plans based on income. Losing employer coverage qualifies individuals for a Special Enrollment Period. Depending on household income, premium tax credits can significantly reduce costs, with some qualifying for plans with little to no monthly premium. Medicaid may be an option for those with limited income, as eligibility varies by state.

Short-term health insurance plans can provide temporary coverage at lower premiums than COBRA but with limited benefits. These plans often exclude pre-existing conditions and essential services like maternity care or mental health treatment. Another alternative is joining a spouse’s employer-sponsored plan, which may be more cost-effective. Many employers allow mid-year enrollment due to job loss, so acting quickly is important to avoid a lapse in coverage.

Retirement Account Options

Handling an employer-sponsored retirement plan after a layoff requires careful evaluation to avoid tax consequences and penalties. If the account is a 401(k) or 403(b), one option is leaving the funds with the former employer’s plan, provided the company allows it. This can be beneficial if the plan offers low-cost investment options, though access to loans and contributions will be restricted. Some employers charge higher fees for inactive participants.

Rolling the balance into an Individual Retirement Account (IRA) is another approach, offering broader investment choices and potentially lower fees. A direct rollover to a traditional IRA maintains tax deferral, while converting to a Roth IRA triggers immediate taxation on pre-tax contributions and earnings but allows for tax-free withdrawals in retirement. A Roth conversion may be advantageous if income is temporarily lower, reducing the tax impact.

The IRS permits penalty-free withdrawals from an IRA for certain expenses, such as higher education and first-time home purchases, though ordinary income tax still applies.

Mortgage or Rent Payment Considerations

Housing costs are often the largest monthly expense, making it essential to manage mortgage or rent payments after a layoff. If savings are limited, prioritizing housing expenses over discretionary spending can help prevent financial distress. Landlords and lenders may offer temporary relief, but these options should be explored before falling behind on payments.

Homeowners struggling with mortgage payments should contact their loan servicer to discuss forbearance or loan modification options. Forbearance allows for a temporary pause or reduction in payments, though interest may still accrue. Loan modifications can extend the loan term or adjust the interest rate to lower monthly costs. Government-backed loans, such as FHA, VA, and USDA mortgages, have specific hardship programs for structured relief. Selling the home or refinancing to a lower rate may also be viable if long-term affordability is a concern.

Renters should communicate with their landlord as soon as financial difficulties arise. Some landlords may agree to a temporary rent reduction or payment plan for tenants with a strong rental history. Local rental assistance programs, often funded by state or municipal governments, can provide short-term financial aid for rent and utilities. If eviction becomes a risk, understanding tenant rights under state laws can help navigate legal protections, such as required notice periods or eviction moratoriums in certain jurisdictions.

Managing Debt Obligations

Debt payments can quickly become unmanageable after losing a job, making a strategy essential to prevent missed payments and credit damage. Prioritizing obligations based on interest rates and consequences of non-payment can help allocate limited resources effectively. Credit cards, personal loans, and auto loans typically have higher interest rates and stricter penalties for missed payments compared to student loans or medical debt.

Credit card issuers and lenders may offer hardship programs with temporary relief, such as reduced interest rates, deferred payments, or waived fees. Contacting creditors before missing a payment increases the likelihood of negotiating favorable terms. Balance transfer credit cards with 0% introductory APR periods can help consolidate high-interest debt, though approval depends on creditworthiness. A debt management plan through a nonprofit credit counseling agency can provide structured repayment with reduced interest rates.

Federal student loans have built-in deferment and forbearance options, allowing borrowers to temporarily pause payments without impacting credit scores. Income-driven repayment plans can adjust monthly payments based on current earnings, potentially reducing them to as low as $0. Private student loan lenders may offer similar hardship options, but terms vary. Auto loan lenders may allow payment extensions, though this often results in higher overall interest costs. If repossession becomes a concern, selling the vehicle or refinancing to a lower rate may be alternatives to consider.