Tech Layoffs and Debt: What to Do When the Job Search Fails

Steve’s answer:

I hear the desperation in your question, and you are definitely not alone in this nightmare. The tech industry is experiencing something we haven’t seen since the dot-com crash, and it’s blindsiding people who thought their skills were recession-proof. That constant rejection after hundreds of applications? The shrinking bank account? The 3am panic attacks? I’ve been there and I know what it feels like when the math just doesn’t work anymore.

But before you even think about touching that 401k, let’s talk about what’s really happening here and what your real options are. Because what you’re dealing with isn’t a character flaw; it’s an economic reality that thousands of tech workers are currently living through.

The technical unemployment reality that no one is talking about

The numbers are staggering and confirm exactly what you are experiencing. According to federal employment data from the Department of Labor”Unemployment in the technology sector rose to 5.7% in January, up from 3.9% last December, surpassing the overall national unemployment rate of 4%. The number of unemployed IT workers rose from 98,000 in December 2024 to 152,000 in January 2025.”

That’s a 55% increase in tech unemployment in just one month. You’re not failing at your job search – you’re competing in a market where there are literally 54,000 more tech workers looking for a job than there were 30 days ago.

But this makes it even harder: Research by the Federal Reserve shows this “Occupations that embraced generative AI most intensively showed the largest unemployment gains, with a correlation coefficient of 0.57.” The very technology that should make us more productive is now eliminating our jobs.

Why this is causing a debt crisis

This is what happens when skilled professionals face long-term unemployment: the math breaks. Your expenses don’t stand still while you look for a job. Rent, insurance, groceries, minimum payments – they all keep coming. And unemployment benefits? They don’t come close to replacing an engineering salary.

The emotional toll makes it even worse. Research from Johns Hopkins confirms this that “medical debt is significantly more common among adults with depression or anxiety compared to adults without these mental disorders.” When you deal with constant rejection and financial stress, your mental health suffers, affecting your job search performance, causing more financial stress.

It’s a vicious circle. And it’s not your fault.

Your Options (and Why 401k Withdrawal is Almost Always Wrong)

I know the 401k seems like the obvious solution. You have money lying there and the creditors are calling. But let me show you the real math.

If you withdraw $25,000 from your 401k today, show financial projections “That $25,000 would become $135,686 by the time you turn 65,” assuming 7% growth. You’re not just borrowing $25,000 – you’re stealing $135,000 from your future self.

Plus the immediate fine. This is evident from calculations by US News “A 45-year-old who takes a $10,000 early withdrawal could pay $3,200 in income taxes and the tax penalty if he falls into the 22% tax bracket.”

These are your real options:

Option 1: Chapter 7 Bankruptcy

This fully protects your 401k and eliminates credit card debt. This is evident from figures from the Federal Reserve “The average debt relief after foreclosure discharges in 2013-2019 is approximately $80,000.” And despite what you’ve heard about credit damage, WalletHub research found “Within a year of filing for bankruptcy, 43% of individuals had a credit score of 640 or higher.”

The automatic stay will immediately stop all collection calls. Your pension remains intact. And when you get that next job, you’ll start over instead of drowning in debt.

Option 2: Strategic standard

Stop paying unsecured debt, save money for living expenses, and use the breathing room to focus on your job search. Yes, your credit will take a hit, but it’s temporary. The money you don’t send to credit card companies can keep you housed and fed while you find work.

Option 3: Debt settlement (if you have cash saved)

If you still have some savings left, you can make a lump sum arrangement. But be realistic about success rates. This is evident from data from the Government Accountability Office “less than 10 percent of Colorado consumers successfully completed their debt settlement programs” when agencies tracked results.

The mental health factor

Something no one talks about: long-term unemployment combined with debt stress leads to clinical depression. Research from the University of Alabama confirms this “Financial stressors – mainly debt, but also wealth loss and bankruptcy – were actually linked to the risk of being diagnosed with a psychiatric disorder (including depression and anxiety).”

If you are depressed, you cannot look for a job effectively. You can’t apply for jobs properly if you’re panicking about money. This is why tackling the debt crisis is actually part of solving the employment problem.

Understanding why you respond to money stress the way you do can also be helpful. I’ve created a Money Personality Quiz that reveals your natural financial tendencies – it might explain patterns you’ve noticed during this crisis.

What I’ve seen work

I’ve been helping people through financial crises since 1994, and I’ve seen this pattern before – during the dotcom crash, the 2008 recession, and now with the pushback of AI. The people who recover fastest are those who:

1. Protect their pension at all costs – That money is your safety net for life, not a piggy bank for temporary problems

2. Tackle the debt crisis quickly – Usually due to bankruptcy or strategic default

3. Concentrate completely on your job search – Without the mental fog of financial panic

I filed for bankruptcy myself in 1990 when my real estate company went bankrupt. Although it felt like a failure at the time, it gave me the fresh start I needed to rebuild. The shame was temporary. The financial freedom was permanent.

If you’re considering bankruptcy, my bankruptcy guide explains exactly what to expect and how the process works.

The path forward

Stop thinking this is a personal failure. The tech industry is going through a fundamental shift and you are trapped by economic forces beyond your control. Your task at this time is:

1. Keep your pension – Don’t touch that 401k

2. Get debt relief – Whether it concerns bankruptcy, default or settlement

3. Protect your mental health – This crisis is temporary

4. Keep networking – The labor market will recover

If you’re looking through these options and still aren’t sure which one is right for your situation, I’ve put together a step-by-step guide through the decision-making process.

TL; DR

• The technical unemployment crisis is real – Unemployment rate of 5.7%, 54,000 additional unemployed tech workers in one month
• Don’t raid your 401k – $25,000 withdrawal costs $135,000 in future growth plus immediate penalties
• Bankruptcy protects pensions – Average debt relief of $80,000, credit scores recover faster than expected
• Tackling debt to improve job search – Financial stress causes depression, which hurts job application performance
• This is temporary – Focus on protecting your future, not fixing the past

Look, I know this feels overwhelming right now. But you’re not the first tech to deal with this, and you won’t be the last. The person who got into this situation is not the same person who is looking for a way out; you have already grown from this experience. Now let’s use that growth to make smart decisions about your future.

Stop worrying about the past. Let’s face the future together and do better NOW.

If you have a situation you’d like me to discuss, you can submit a question via the podcast page. I regularly answer listener questions, and yours may help someone else going through the same thing.

Frequently asked questions

How long does technical unemployment typically last in this market?

Current data shows that tech workers face unemployment spells of six to 12 months, significantly longer than the three to four months typical before 2024. The AI ​​displacement factor is driving longer job search timelines.

Can I file for bankruptcy while unemployed?

Yes, and it’s actually often the best time. Unemployment income is typically below the income test for Chapter 7, making qualification easier. Your 401k and other retirement accounts are fully protected.

Will bankruptcy hurt my chances of getting hired in the tech sector?

Most tech companies don’t run credit checks for tech positions unless they involve financial access. Bankruptcy is a personal financial issue, not a professional competency issue.

Should I take a lower-paying job outside the tech sector to avoid bankruptcy?

That depends on your specific situation. Sometimes a strategic bankruptcy while you’re looking for the right position is better than a 60% pay cut that still doesn’t meet your current obligations.

How much can I protect in bankruptcy if I am unemployed?

Federal exemptions fully protect retirement accounts, plus $29,275 in personal property and possibly your home equity. State exemptions can be more generous depending on where you live.