What is a Hardship Program?

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According to the Northwestern Mutual 2019 Planning & Progress Study, Americans reported an average of over $29,000 in debt. Whether you’ve been struggling with debt for a while or you’re facing new issues due to emergency times, a hardship program might be able to help.

What Is a Hardship Program?

Hardship programs are lender policies that can provide some relief for people who are experiencing financial difficulty. The details of these programs vary by lender and loan type, but they typically involve an agreement between you and the lender. The lender might allow you to skip certain payments, make reduced payments or reduce your interest rate so monthly payments are lowered.

How to Qualify for a Hardship Program

The qualifications for hardship programs depend on each lender. Typically, lenders require that you show that you have a need via some type of documentation. You may also have to show that your situation has changed such that you can’t make payments as previously agreed upon. Some examples of situations that could help you qualify for a hardship program include:

  • A disaster or emergency
  • The loss of a job or a change in income
  • Increased expenses, such as unplanned medical bills
  • Major life changes, including a death in the family or a divorce

How to Apply for a Hardship Program

Many lenders offer assistance programs, but they require applications and documentation. Contacting your lender to ask about hardship programs as soon as possible helps ensure you can complete the process and enroll in a program before you collect excessive late fees or find yourself in a worse situation. (Like foreclosure.)

1. Reach Out to Your Lender

Call the customer service or hardship phone line listed on your statements, loan paperwork or lender’s website. You can also check your lender’s website to see if there is an online option for applying for a hardship program. Many lenders offer digital applications or downloadable forms you can print, fill out and mail in.

2. Write a Hardship Letter

Whether your lender has an application in place or not, it’s a good idea to send a hardship request letter. You can send this letter as an attachment with an application and any other documentation they require. A hardship letter is where you can make your case logically and calmly. You should never lie, use your letter to complain about an unfair situation or promise that things will change in the near future. Instead, include the following information in your letter:

  • What led to the current situation
  • Why you can’t change the situation now and need assistance
  • Steps you’ve taken to try to cope with or improve your financial situation

Include as many specifics as possible and try to support your story with facts and figures. For example, if your child required a new medication you would write that it has an out-of-pocket cost of $300 a month and that you have sold one of your cars to help cover expenses.

The goal is to show that a hardship program is your last resort—other than going into default or foreclosure. Remember to keep copies of your hardship letter and all other documents for your records.

How a Hardship Plan Will Affect Your Credit Score

Enrolling in a hardship plan doesn’t directly impact your credit score, but how the creditor manages your account can indirectly impact your credit in a few different ways.

Your Lender Closes Your Credit Account

If you enter into a hardship program, it’s possible your lender may close or temporarily suspend your account. (This is more common with revolving credit accounts such as credit cards.) In most cases, lenders don’t want you to keep using your credit account until it has been remediated or your financial situation has improved.

If your account is closed, it may increase your credit utilization ratio, change your credit mix or affect the age of your credit—all of which could reduce your credit score.

The Hardship Program Could Appear on Your Credit Report

Typically, lenders who agree to work with you via a hardship program won’t report you as making late payments or missing payments as long as you’re making all payments as agreed under the program. (This varies between lenders—make sure you check with yours.)

That being said, they might update their information on your credit report to show that you have entered into a hardship plan. If you apply for a new loan or credit account in the future, lenders will see the hardship plan when they pull your credit report—which may affect your ability to qualify.

What to Do If You Are Denied Enrollment

If your lender doesn’t offer a hardship plan or denies your application—and you can’t otherwise negotiate credit payments down—you can try some other options. Here are three things to try:

1. Consolidate Your Debt

If you can’t make your debt payments as they’re currently structured, you might consider consolidating your debt to make it more manageable. You could also try consolidating credit card debt with a balance transfer card with a 0% introductory APR that helps you get ahead on your debt faster.

2. Take on Another Job

Sometimes, you can’t find a way to reduce expenses or bills. That means you might have to increase your income. Taking on a second job is one of the quickest ways to do this. You could also do odd jobs or join the gig economy to make more money on the side.

3. Request a Forbearance

Depending on what type of loans you’re dealing with, you can request a forbearance.  Forbearance allows you to stop making payments for a specific period of time without accruing extra interest or penalties. Usually, your payments are added on to the end of the loan, but you’ll want to be sure to understand your agreement and future payment responsibility.

Financial Hardship Resources for COVID-19

While various lenders have hardship programs in place as a natural course of business, many are stepping up to offer extra assistance during the COVID-19 pandemic. The federal government is also providing some provisions for relief via the CARES Act. Some resources for financial hardship during COVID-19 include:

  • Loans for small businesses to help ensure they can keep people on the payroll
  • Financial aid via stimulus checks for many people
  • Provisions to extend unemployment to more people and increase the amount of unemployment that’s paid out
  • Certain credit protections and accommodations consumers might be able to take advantage of

Whatever money issues you’re dealing with, taking a proactive approach—whether you’re trying to rehabilitate your credit or figure out how to cover your loan payments—is typically best.

If you have any questions about what can affect your credit score or how financial hardship may show up on your credit report, give one of our credit advisors a call.

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