You can't switch items during combat. In other words, you can't chose to wear a different helmet or different armor once combat has started. You also can't "unwield" one item which uses hands and "wield" another in its stead. Basically, all the items you were using or carrying must remain in their current states. Unfortunately, this means that if you lose or change your class or race, you don't start getting bonuses from other items you have in play that are usable by your new race or class, including items that anyone could use.
An example of such a case: An Elf is using the Bow with Ribbons and is carrying the Sword of Slaying Everything Except Squid. He has no extra Hands, so the Bow is using both of the Hands he has available. The Elf then goes into combat with anything but Squidzilla and is subsequently Cursed by another player to lose his race. He now loses the bonus for the Bow, and since he can't switch out the Bow and replace it with the Sword, he gets no bonus from it. As an aside: Should the player have another Elf card, he could play that immediately and get back his bonus from the Bow.