Debt hardship program: finding a solution for financial challenges

When credit card bills are piling up or you're in danger of falling behind on loan payments, you need a lifeline. The struggle to make ends meet and meet your financial obligations can be emotionally and mentally draining. 

Acknowledging the situation and looking for help are the first steps on your journey to a better financial situation. Many lenders and creditors offer debt hardship programs that can give you the breathing room you need to get back on your feet. 

This is what you need to know about debt hardship programs, who qualifies, and how to get help. 

What is a debt hardship program?

A debt hardship program can help you manage debt payments when they are becoming overwhelming. Hardship programs are different from debt consolidation and debt resolution, and they don't wipe out what you owe or your obligation to pay. But they can make it easier to keep up with payments by changing the payment amount, spreading out your payments, lowering interest charges, or helping you avoid fees. 

Hardship programs got a lot of attention during the COVID-19 pandemic when many people were having a hard time, but they haven't gone away. You can still get help in these ways:

1. Payment pause. Deferment and forbearance plans are two ways to hit the pause button on payments. So, if you lose your job or get sick and can't work, you won't have to worry about making payments for a little while. In a deferment, interest is also usually paused. In a forbearance, however, you'll be charged interest even if no payment is due. That means at the end of your payment pause, you might owe more money than you did before. You can avoid increasing your debt by making interest payments during the forbearance‌ period.

2. Reduced payments. If a payment pause isn't an option, you might still be able to make smaller monthly payments temporarily. Lower minimum payments could give you breathing room if your budget is tight. 

3. Loan modifications. Some lenders may be willing to change your loan terms. They may agree to lower your interest rate, waive fees, or give you more time to pay off the debt. 

What kinds of debt can a hardship program help with? It depends on what a creditor or lender offers, but the list can include:

• Credit card debt

• Private student loans

• Mortgage loans

• Auto loans

• Personal loans

Federal student loans have their own special hardship programs that you can apply for through your loan servicer. You can find your servicer and more information at studentaid.gov. 

The IRS offers hardship help for people who owe tax debt. You can request a payment plan to get caught up. In some cases, the IRS will settle tax debt for less than what you owe.

You might be able to get medical bills lowered or forgiven through your hospital or doctor's office. 

How to qualify for a debt hardship program

Qualifying for every debt hardship program is a little different. First, breathe and get ready to be your own best advocate. Asking for help can be a humbling experience, but it's worth it. Solving your current financial problems is what will give you the freedom for greater financial success in the future. 

Generally, you'll need to show proof of a financial hardship that makes it difficult or impossible to pay your debts. 

For example, you might be able to get into a hardship program if you:

• Get sick and can't work but don't qualify for disability benefits that replace your paychecks.

• Are hurt on the job, but it's taking a long time to get workers' compensation benefits. 

• Have to take time off from work to care for a critically ill child and you don't have any other income. 

• Were laid off from your job and you're having trouble finding a new one.

• Lost your spouse unexpectedly, and they didn't leave behind a life insurance policy to help you replace their income. 

• Are going through a divorce, and have limited access to savings while you're working out a financial agreement with your spouse. 

It's up to the creditor or lender to decide what counts as a financial hardship. 

When you apply for a debt hardship program, you'll typically have to detail the reasons. You might be able to apply online or over the phone. Your lender or creditor may ask for documentation proving your hardship. That could include copies of medical bills, pay stubs, and bank statements, or a written letter from a trusted person who knows the situation and can vouch for you. 

Benefits and downsides of debt hardship programs

Debt hardship programs can provide relief when you're not able to pay what you owe, but they aren't a silver bullet. Here are the main pros and cons to know. 

Benefits of debt hardship programs

• You might get lower interest rates, which could save you money. 

• Some credit card hardship programs reduce or eliminate late fees or annual fees. 

• Getting new repayment terms could make it easier to keep up with payments. 

• Applying for hardship relief can keep creditors from taking collection actions against you. 

Downsides of debt hardship programs

• Creditors and lenders aren't required to offer debt hardship programs. 

• Certain types of financial hardships may not qualify. 

• Debt hardship programs may have a negative impact on your credit. 

• A debt hardship program is a temporary fix. 

Whether debt hardship programs are right for you can depend on what kind of debts you have, and your general financial situation. 

Debt resolution programs for debt hardship

Debt resolution could help you if you don't qualify for a debt hardship program, or if the programs offered to you don't give you as much help as you need. When you resolve debt, you're asking your creditors to let you pay it off for less than what you owe. 

For example, say you owe $5,000 on a credit card, and you've fallen behind on making minimum payments because you suffered an injury and had to stop working. You make an offer to the credit card company to pay $3,000 in exchange for canceling the rest of the debt. If the creditor agrees, you don't have to pay the remaining $2,000. 

You can negotiate with creditors on your own, or work with a professional debt resolution company.

If you're interested in resolving your debt, here are a few key points to know:

• Creditors might not agree to a deal unless you're behind on payments. Missing payments could negatively impact your credit.

• You'll need to set aside money regularly so that once an agreement is reached, you are able to pay your creditor for the agreed amount. Some creditors may agree to a series of payments instead of a lump sum.

• Resolving debt could help you avoid a worst-case scenario like bankruptcy. 

• Depending on your financial situation, you may have to report forgiven debt to the IRS as taxable income. (Most people who enroll in a debt resolution program don't pay taxes on the forgiven debts.)

Resolving debts might be a good idea if you can't afford to repay your debts in full and you need partial forgiveness. If you enroll in a debt resolution program, you'll still have to make monthly payments, but they could be lower than your minimum monthly payments. If you can't afford to pay anything each month, bankruptcy might be a more realistic option.

A free debt evaluation can help you decide if debt resolution might work for you.

Alternatives to debt hardship programs

When you're experiencing financial hardship, it helps to know all your options for dealing with it. You might consider a debt management plan, or debt consolidation through a personal loan. 

Debt management plans

Debt management plans (DMPs) let you make one payment each month to a nonprofit credit counseling agency. The agency distributes that payment to your creditors. The payment amount is calculated to pay off all your debts in full within three to five years. Some people are unsuccessful in a DMP because the payment amount is too high.

Debt management plans don't reduce what you owe. The credit counseling agency will negotiate with your creditors to lower your interest rates or waive fees. 

The rules are strict. If you miss a payment, the plan might end. And you won't be able to use credit cards while you're in the plan. 

A DMP may be a good option if you need help organizing and managing your finances, you want to repay your debts in full, and you don't mind setting aside your credit cards for a few years.

Debt consolidation

Debt consolidation is a new loan that you use to pay off one or more other debts. One benefit is that you could reduce the number of monthly payments you have to make down to just one. Most debt consolidation loans are personal loans. Personal loans tend to have lower interest rates than credit cards and other high-interest debts.  

Debt consolidation can make managing debts easier since you’ll have just one fixed monthly payment. And it might be lower than the minimum monthly payments you're making now. If you're interested in a consolidation loan, start a conversation with a Loan Consultant to get an idea of what you might qualify for. 

If you own a home, you could also consider a home equity loan to consolidate debt. When you get a home equity loan, you're pledging your home as a guarantee that you'll repay the debt. If you don't repay the loan, you could lose your home. This guarantee lowers the risk for the lender, so home equity loans tend to have lower interest rates than personal loans, which means you could save even more money.

The most important thing to remember? When you're dealing with financial hardship, the solution has to work for you. And knowing that you do have options can help you keep a cool head when your debt seems overwhelming.