Most people experience financial hardship at some point, and they usually find a way to get through it. So can you—youre doing the right thing by researching options to deal with your debt and learning whether your situation might qualify for debt resolution.
Experiencing financial hardship can happen to anyone. Your income can take a hit, expenses can rise, and you may find yourself unable to pay all your bills. Financial hardship means you’re having trouble meeting your financial obligations.
When this happens, it’s important to understand your rights and the assistance available. And if you owe debts, being able to prove financial hardship may help you get some relief from creditors.
What Constitutes Financial Hardship?
Some key things that indicate financial hardship include:
-
Loss of income – due to job loss, reduction in pay or hours, or decline in business revenue.
-
Increased expenses – due to medical costs caring for family members home or car repairs, or other essential but unexpected costs.
-
Life events – like divorce, a death in the family, accidents or disasters.
Essentially, financial hardship means your income no longer covers your necessary living expenses and debt payments. You’re left unable to pay bills, make loan payments, or meet other financial obligations.
Any situation that negatively impacts your finances through no fault of your own could potentially qualify as a financial hardship if it leaves you unable to pay your debts
Proving Financial Hardship
If you need to negotiate reduced or alternate payment arrangements with creditors you’ll need to prove financial hardship. This involves showing documentation that verifies your situation.
For income loss, provide documents like:
- Layoff notice
- Unemployment approval
- Paystubs showing reduced income
For increased expenses, provide invoices and statements for things like:
- Medical treatment and medications
- Home repairs
- Temporary housing
Also document loss of income related to the hardship, like paid caregivers if you couldn’t work while recovering from a medical issue.
Provide copies of legal documents for events like divorce. Explain in writing how the event impacted your finances.
The better you can demonstrate a dire financial situation, the more likely a creditor will provide relief. Be ready to share details like your current income, bills, and proposed new payment arrangement.
Government Assistance Available
If you’re facing financial challenges, explore programs that offer help with basic necessities. Government assistance can provide:
-
Food aid – SNAP/food stamps, school meal programs, food banks, and WIC for women and children.
-
Housing assistance – Subsidized public housing, emergency shelters, rental/mortgage relief grants.
-
Utility assistance – Bill payment help and shutoff protection for electric, gas, water, phone.
-
Unemployment benefits – Compensation while between jobs.
-
Cash assistance – Temporary monthly payments through TANF for very low income households.
-
Free healthcare – Medicaid, CHIP for uninsured children, healthcare.gov plans.
-
Legal help – Legal aid offices assist with civil cases like debt collection.
Eligibility varies, but these programs aim to support basic needs during financial crises. Apply as soon as possible once hardship occurs.
Negotiating With Creditors
If you owe debts and experience financial hardship, contact creditors right away to explain the situation. Ask for reduced or paused payments until you recover financially.
By law, creditors must consider reasonable hardship repayment requests for personal loans and credit cards. You’ll have to share information to prove hardship. If they refuse your proposal, you can file a complaint.
Some relief options creditors may provide:
- Lower interest rates
- Reduced monthly payments
- Extended repayment timeline
- Partial debt forgiveness
Results vary, but a legitimate financial hardship gives you a stronger case for debt relief. Keep making whatever payments you can afford while negotiating. Get help from a credit counseling agency or debt settlement service if you need assistance negotiating with creditors.
Protecting Your Credit and Assets
Financial hardship can negatively impact your credit if you miss payments. To minimize damage:
-
Get agreements for reduced payments in writing. As long as you meet the new terms, it shouldn’t worsen your credit.
-
Keep communicating with creditors before payments are 30 days late. This helps avoid default notices.
-
Don’t ignore calls and letters from creditors – work with them on repayment plans.
-
Avoid non-essential purchases on credit until you recover financially.
Prioritize keeping current on secured debts like mortgages and auto loans. Defaulting could result in foreclosure or repossession – you risk losing major assets. Ask about forbearance programs to temporarily pause or reduce payments if needed.
Overcoming Financial Hardship
Financial setbacks happen, but resources are available to help you get through them.
-
Cut expenses where possible to free up cash for essentials.
-
Use government aid programs to help cover food, housing, utilities and other basic needs.
-
Communicate with creditors to negotiate temporary relief from debt payments.
-
Consider debt management help from non-profit credit counseling agencies.
-
Get a part-time job or side gig to generate extra income quickly.
With planning, budgeting, and utilization of public assistance, you can hopefully overcome financial challenges. The important thing is taking action to prevent things like utility shutoffs, evictions, and vehicle repossession. If you act early and get the right help, you can usually make it through periods of financial hardship.
Qualifying financial hardships for debt resolution
Qualifying financial hardships fall into two categories: hits to your income, and unexpected expenses. And sometimes, you might get a double whammy—a medical emergency, for instance, that causes income loss while youre incurring healthcare costs.
When you experience a financial hardship, you want to explain what happened and show how it impacts your ability to pay what you owe. Being able to prove a hardship is essential in debt negotiation when youre asking for help with credit card debt or other balances. It may also help to document your attempts to find new work, enroll in job training, or reduce expenses.
Other costly unexpected expenses
In some cases, large unexpected expenses may qualify as a financial hardship. For instance, a major car repair you have to make so that you can get to work, or an expensive home repair like fixing your roof thats leaking or a burst water pipe thats causing flooding. Any major financial situation that puts your ability to pay your bills into question is worth a conversation with a debt expert.
When you (or a debt resolution company working on your behalf) ask for help from your lenders, give them a good reason to say yes. Offer a letter of explanation and list the amounts involved. Provide documents to back up your claim. And specify (respectfully) what sort of help youd like from your creditor—interest rate reduction, payment reduction, balance reduction, more time to pay, and so on.
Creditors arent required to reduce what you owe, but many will when it makes sense to do so. The better you (or your debt resolution company) are at making this request, the better your chances of getting what you need.
- Get all the details out on the table, even if its painful or embarrassing to crunch the numbers. Understand your situation. How much income did you lose? How much did your costs increase? What can you offer your creditors? What do you need from them?
- Assemble paperwork to back up your claim of lost income or increased expenses.
Write a hardship letter explaining your situation. Contact your creditors and negotiate your debt. Or let an expert debt negotiator do the heavy lifting on your behalf.
Gina Freeman has been covering personal finance topics for over 20 years. She loves helping consumers understand tough topics and make confident decisions. Her professional history includes mortgage lending, credit scoring, taxes, and bankruptcy. Gina has a BS in financial management from the University of Nevada.
James is a financial editor for Achieve. He has been an editor for The Ascent (The Motley Fool) and was the arts editor at The Valley Advocate newspaper in Western Massachusetts for many years. He holds an MFA from the University of Massachusetts Amherst and an MA from Hollins University. His book Krakatoa Picnic came out in 2017.
What Qualifies As A Financial Hardship For A 401(k) Withdrawal? – Learn About Economics
FAQ
What is a qualifying financial hardship?
Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or …
What is an example of a financial hardship?
Changes in employment status (such as furlough, losing a job, or having hours reduced) Significant life events (such as a relationship breakdown or death in the family) Injury or illness. Emergency event or natural disaster.
How do you prove you are in financial hardship?
- Bank statements that show income and expenses.
- Copies of your most recent tax returns.
- Copies of pay stubs.
- Copies of other bills (credit cards, utilities, medical bills, etc.).
- Letters of unemployment or notices of reduction in pay/hours.
- Eviction notice.
- Medical bills.
What proof do you need for a hardship withdrawal?