How to Use a Hardship Program for Debt

Having trouble paying your bills? Feel like you are in over your head with debt? It may be time to pursue a debt/financial hardship program. These plans can help you get your financial footing when you face serious money problems.

Take the time to learn more about debt hardship programs, how to qualify, if you are a good candidate, and more.

What Is a Financial or Debt Hardship Program and How Does it Work? 

A financial hardship program is a plan provided by your creditor to give you a temporary break on your debt repayment. If you qualify for hardship help, your creditor may be able to offer options like forbearance, deferred payments, or modifications to your interest rate or payment amount.

“A financial or debt hardship program is a program a lender might offer its customers to help them with the timing of payments or other assistance,” explains Rhett Roberts, CEO of LoanPro, a lending core software, in Farmington, Utah.

Why should lenders/creditors offer debt hardship programs? Because they have an incentive to help their customers.

“Imagine you are a lender who gives out a loan. The borrower makes payments pretty consistently for a few months or even years. Then, when the loan is approximately halfway paid off, the payments start coming in late and for less than what is due. If it’s clear that the borrower is having difficulty paying and the lender does nothing, this creates both a frustrated lender and a frustrated consumer who does not feel the lender is helping them when they need aid,” Roberts explains. 

“Instead, if the lender reaches out to their customer and offers a financial hardship program to allow them to have reduced payments, skip payments, or other options, this helps both parties. For the lender, the upside is that this actually increases portfolio performance and brand loyalty with the consumer.”

You May Like These

10 Holiday Shopping Debt Traps You Need to Avoid

Credit Card Debt Forgiveness

Debt Solutions

Financial Hardship Program: 3 Types to Request

There are three main types of financial hardship assistance commonly available to eligible borrowers: forbearance, deferred payments, and modifications to your interest rate or payment.

Forbearance

A lender or creditor might agree to forbearance – letting you pause or reduce your payments for a limited time before resuming a regular payment schedule.

“This can help with temporary issues like a medical concern that keeps you from working while you recover,” says Roberts.

Deferred payments

In most cases, deferment allows you to stop making payments or reduce your payable amount for up to three years.

“No interest is accrued on loans during a deferment period because the lender picks up the interest payments,” notes Lyle Solomon, a financial expert and attorney with Oak View Law Group in Rocklin, California. 

“Deferment is regarded as a stopgap measure. If you believe you will be unable to resume payments in three years or less, you should look into other debt hardship program alternatives.”

Keep in mind that, with deferred payments, the deferred payments are not forgiven. They are added to your loan balance, and your loan may be reported as current to credit bureaus. 

“This is an ideal option to get over a one-time financial issue that won’t affect your ability to pay in the future,” adds Roberts.

Modifications to your interest rate or payment

A loan modification changes your existing loan by modifying the repayment term, interest rate, or other fine print.

“This could involve changing the type of loan, extending your repayment period, lowering your interest rate, reducing your monthly minimum payment required, or lowering your principal amount due,” Solomon says. “If you cannot make your current payments or have already fallen behind, a loan modification can help you in one of these ways.”

Debt-specific hardship programs

Forbearance, deferred payments, and loan modification are the three most common types of financial hardship programs available to eligible borrowers for many types of debt. But there are also particular strategies you can pursue depending on the kind of debt you have, including:

Hardship programs for credit card debt

Have you maxed out your credit cards? Your credit card company may offer forbearance, modified payment programs, fee waivers, or a decreased interest rate as hardship program options.

Hardship programs for mortgage debt

Your mortgage lender may offer mortgage modification, refinancing, or reverse mortgage options to help with your hardship.

Hardship programs for tax debt

If you have outstanding tax debt, your IRS hardship program choices may include an IRS offer in compromise, installment agreement, IRS forgiveness program, penalty and interest payments, innocent spouse relief, and tax settlement.

Hardship programs for student loan debt

When you have student loan debt, an income-based repayment plan, forbearance, deferment, student loan forgiveness, pay as you earn, and revised pay as you earn are among the hardship routes you can explore.

Who’s eligible for a financial hardship program

The best candidates for a debt hardship program are those with a genuine need for financial assistance who desire to pay off their debts. Legitimate scenarios that may qualify you for a hardship program include:

• Unemployment

• Major salary reduction

• Medical emergency, illness, or injury

• Divorce

• Natural disaster

• Death of a family wage earner

“You are more likely to be eligible if you face financial crisis due to one or more of these circumstances,” Solomon says. “Poor candidates are those in financial hardship due to overspending and money mismanagement. Among other criteria, creditors look at payment history and are less likely to offer a hardship plan to irresponsible consumers.”

Nevertheless, “most lenders are empathetic toward borrowers and would much rather get paid a little later or a little differently than see someone face bankruptcy or foreclosure,” Roberts points out.

How to Apply for a Hardship Program

If a hardship program sounds like the right for for you, here’s a breakdown of how to apply: 

1. Examine your budget

Before applying, you’ll want to have a strong understanding of your financial situation. Review your monthly income and expenses. Consider everything from housing and bills to transportation, insurance and childcare. 

If there are areas where you may be able to cut costs to improve your budget, make a plan to do so. 

“This will give you an idea of how much money you will need to survive,” says Solomon. 

“When you add up all your monthly expenses, you’ll know how much you have available to spend. Subtract that amount from your income to see where you end up. You probably don’t need or qualify for a hardship plan if you make a profit or have extra cash. But if you are in financial difficulty, this may be the time to seek the assistance of a hardship plan.”

2. Contact your creditor 

Now that you have a full picture of your financial situation, reach out to your creditor or lender to discuss your options. Explain your circumstances and tell them that you are interested in applying for a hardship program. 

“Call your creditor’s customer service number and explain that you cannot make your payments. Tell the representative you are looking for a hardship program. If there is a solution, the representative will most likely transfer you to a loss-mitigation or hardship department for more information,” Solomon adds. 

3. Compare options 

If you’re eligible, the creditor will provide you with one or more hardship programs. Get as much information about each program as you can to make sure you pick the one that’s the best fit. If none of them are a fit, ask if there are alternatives.  

“Make sure the hardship program fits your budget and financial objectives. You don’t want to enter into an agreement without confirming that you can afford the bare minimum,” Solomon says. 

Once you decide on a hardship program, ask for specific requirements and documents needed to apply. 

3. Prepare your documentation

To make the application process smooth, gather all the necessary documents to illustrate your financial hardship. These could include: 

• Documentation of job loss or reduced hours

• Recent pay stubs or proof of income

• Medical bills or proof of medical expenses

• Food stamps award letters

• Bank statements 

• Military deployment or transfer letter

• Divorce or separation paperwork 

4. Submit your application

Fill out the application form provided by your creditor or lender. Attach all required documentation. 

Before you submit your application, ensure all the information is accurate, complete and up-to-date.  

5. Follow up

After you submit your application, check in with your creditor. Make sure they received all the necessary documents and ask if they need any additional paperwork.

Keep a close eye on your email or mail—depending on how the lender has said they will contact you about your application—so you don’t miss a status update on your application. 

6. Review the terms 

If you’re approved for a hardship program by your creditor, review the terms carefully. Make sure you understand any changes to the plan and if your payment size has changed, ensure your budget can accommodate at least make the minimum payment. 

Double check that you meet the new terms and conditions before accepting the program. These could include making a fixed payment per month for a set period and/or meeting with a credit counselor regularly.  

“Ensure that you meet all of the plan’s requirements. Failure to do so may result in the creditor discontinuing the hardship program, returning you to square one,” cautions Solomon.

Financial Hardship Program vs Debt Settlement

Financial hardship programs commonly lower or delay payments to get past temporary financial troubles. Debt settlement programs, on the other hand, aim to quickly pay off a comparatively larger portion of the loan to avoid long-term debt, per Roberts.

“In a debt hardship program, you typically request the issuing lender to cut down on your interest rate, permit deferred payments, or issue forbearance given your current financial conditions,” says Kevin Miles, a finance analyst with Loan Advisor[EM1] . 

“But in a debt settlement program, you pay a lump sum amount of the debt you owe instantly. In return, the creditor may allow a portion of your debt to be forgiven. The benefit is that you can pay off your debt quickly, while the downside is that it’s up to the creditor if they wish to accept your request or not.”