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 hardship relief program. These plans can help you regain your financial footing when you face serious money problems.

Finding out how to qualify and whether you’re a good candidate for debt hardship programs can be the first step toward solving your debt problems.

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 debt payments. If you qualify, your creditor may offer options like forbearance, deferred payments, or modifications to your interest rate or payment amount.

From a creditor’s point of view, loans are an investment. They don’t want to have to write off that investment because you can’t pay. They would rather find a way for that investment to pay off a little differently than originally planned.

Hardship programs can do this in a variety of ways. They can delay or reduce payments. They can also waive certain fees or penalties. Hardship programs might also improve loan terms, including the interest rate.

Naturally, creditors don’t like to make these changes if they don’t have to. However, they might consider it if you can show you’re having genuine financial difficulties. In that case, they might decide that giving you a break is their best way of getting their investment to pay off. 

Hardship program definition and purpose

A financial or debt hardship program is a financial assistance plan a lender might offer to give temporary relief to its customers who are in severe financial distress. Most hardship programs are temporary.

Why should lenders/creditors offer debt hardship programs? Because they don’t want you to fail to repay what you owe. Suppose your situation makes it impossible to meet the original payment terms. The lender has an incentive to find a different way for you to pay the debt.

Let’s say you’re a lender. Your borrower makes consistent payments for a few years, but starts to fall behind. It’s clear that the borrower is having trouble. Delinquent debts can be very expensive for a lender. It might be better for your bottom line to figure out how to help this borrower get their head above water again. Helping them also improves your company’s reputation. 

Examples of debt types covered

What kinds of debt might be covered by hardship relief programs? Here are some examples:

• Credit card debts. If you have temporary financial problems, the credit card company might make your monthly payment easier to meet.

• Mortgage balances. A mortgage company would rather get paid than repossess your house. If you can’t meet the original payment terms, they may consider changing those terms so you can repay the loan. 

• Student loans. The US government has several programs for borrowers who are having trouble keeping up with their loan payments. These include income-based payments, temporary forbearance programs, and even forgiveness of a portion of your balance.

• Tax debt. The IRS may delay payments, allow you to pay over time, or even agree to accept less than the full amount you owe. 

All of the above depend on genuine financial hardship. To qualify, you need to show why you can’t make your payments, and how you'll pay what you can.

How can borrowers take advantage of hardship programs?

To qualify for a hardship relief program, you need to fully understand your financial situation so you can explain it to your creditor. Creditors are looking for two things: 1) proof of genuine hardship, and 2) a plan for how you can pay what you owe.

To qualify for a hardship relief program, take the following steps:

• List your income and necessary expenses. Figure out how much your budget comes up short, and when this situation might change.

• Gather evidence to document your financial picture. This should include things like paycheck stubs and copies of monthly bills.  

• Contact your creditor. Do this as soon as possible if you realize you can’t pay a bill in full. Working on a solution can head off penalties that would make your problem worse.

• Be calm and respectful. The idea is to work with your creditor on a solution. If you treat creditors like enemies, they’ll be less inclined to help.

• Make your case. Explain to your creditor why you’re having trouble paying your bills. Suggest what payments you might be able to make instead. 

• Listen carefully. Your creditor might respond with questions, or with requests for additional information. Take notes on what they want.

• Follow up. Your creditor might give you next steps to take. These might include filling out an application for a hardship program, or providing additional facts and documentation. Make sure you respond to requests promptly.

• Document any agreement. If your creditor agrees to a modified payment schedule, get it in writing.

Not all creditors offer hardship programs. Those that do don’t necessarily advertise them. However, it’s certainly worth your while to ask.

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Financial hardship program: 3 types to request

Three main types of financial hardship help might be available to eligible borrowers:

• Forbearance

• Deferred payments

• Modifications to your interest rate or payment.

Loan forbearance

A lender or creditor might agree to a forbearance. This means pausing or reducing your payments for a limited time, then resuming a regular payment schedule.

A forbearance could help you get through a temporary financial issue. For example, a medical event that forces you to take a break from work. 

On most loans, interest accrues while your payments are paused. If so, the amount you owe will be higher when you resume payments. When agreeing to a forbearance program, find out whether interest will accrue. Consider paying at least enough to cover the interest so that your debt doesn’t grow.

Deferred payments

In most cases, a deferment allows you to stop paying or to pay less for up to three years.

For some kinds of loans, interest is paused during a deferment. Federal Direct Subsidized student loans fall into this category. (Interest does accrue on Direct Unsubsidized loans.) 

Deferred payments aren't forgiven. Those amounts remain on your loan balance. However, when a loan is deferred, your credit report will show that the loan is current. 

Modifications to your interest rate or payment amount

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

A loan modification can provide lasting relief by permanently lowering your monthly payment. Before agreeing to a modification, check the impact on the total cost of the loan over time. 

Who’s eligible for a financial hardship program?

The best candidates for a debt hardship program are those with a genuine need for financial help to pay off their debts. 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

Lenders will consider the circumstances of your hardship, as well as your account history. 

Note that government student loan programs have an additional set of criteria that include:

• Income

• Type of employment

• Type of loan

• Disability

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. The way these work depends on the type of debt. 

Consider how these solutions might apply to your situation so you know what type of hardship program to pursue. 

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.

How do these apply to credit card debt? Here are some possibilities:

• Postpone a due date if you need more time to get over a temporary financial difficulty

• Reduce the minimum monthly payment to make your bills easier to pay

• Waive late fees if you need time to get caught up

• Lower your interest rate so that more of your future payments go toward reducing your balance, instead of adding to the amount you owe

Hardship programs for mortgage debt

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

Here are some examples of how these can work:

• Extend the term of your mortgage to lower your monthly payments.

• Reduce your interest rate, which could help you pay off the debt sooner.

• Refinance the loan to possibly provide you with cash to pay other bills.

• A reverse mortgage could give you money for your house now, in exchange for an agreement to sell it to the reverse mortgage company later.

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, waiver of penalty and interest payments, innocent spouse relief, or tax settlement.

Here are some of the things these programs could do for tax debt:

• Give you more time to pay

• Reduce the amount you owe

• Prevent penalty fees and interest payments from adding to the amount you owe

• Reduce liability for a spouse’s filing errors that you couldn’t control

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.

Hardship programs for student loan debt are versatile. They may:

• Base your monthly payments on your income

• Pause payments during emergencies

• Waive interest charges and fees while you get caught up

• Reduce the amount you owe

Take the first step

If you’ve been trying your best to pay your bills but can’t keep up, get help. Find out about hardship programs that are available for your situation. The sooner you take that first step, the sooner you can get your finances back on track.