The path to financial health is a long journey fraught with numerous challenges. The global pandemic, sudden emergencies, medical expenses, or unemployment can rapidly force individuals into financial hardship.

While it is stressful, financial difficulties are common. For those who have a retirement plan, dipping into these funds is the only solution in times of financial difficulties. However, only 73% of American workers had access to an employer-sponsored retirement savings plan, such as a 401(k), 403(b), or 457 plan. Among those who had access to a retirement plan, only 56% actively participated as of Q1, 2023. Thankfully, there are many solutions available to recover from financial troubles and reach a point of stability.

What Is Financial Hardship?

Financial hardship occurs when you're willing to pay your debts but are unable to due to an unexpected event that has impacted your ability to pay.

There are many unforeseen circumstances that can cause financial hardship, affecting your ability to meet your financial obligations.

According to the IRS, financial hardship occurs when paying your tax debt and/or other financial circumstances prevent you from meeting reasonable, basic living expenses. Allowable living expenses include:

  • Food, personal care items, and housekeeping supplies
  • Transportation
  • Housing expenses and utilities
  • Out-of-pocket medical expenses  

What To Do When Going Through a Period of Financial Hardship

Here are a few key steps you can take to improve your financial situation and get your life back on track.

1. Make Changes to Your Budget

If your income has changed, it’s important to make changes to your budget. For example, if you’ve recently lost hours at your job, you’ll need to reduce your spending and adjust your budget based on this reduced income.

If you have no income coming in and leverage debt to get by, you can speak to a debt relief company to create a plan for monthly payments. This way, you can start paying it off once your situation improves. Your goal should be to first focus on essentials such as housing, food, and transportation. Cut back on everything else.

2. Contact Your Service Providers

Many utility and service providers are willing to accommodate you if you’re facing financial hardship. Contact them right away to discuss your options so you don’t lose access to the internet, electricity, or water. Prompt communication will also prevent your accounts from going into collections or accumulating a lot of late fees.

3. Explore Hardship Programs Offered by Lenders

If you have any form of debt, reach out to your lenders to ask about available financial hardship assistance programs. You may be eligible for financial assistance for auto loans, student loans, credit cards, and your mortgage.

Your mortgage servicer, for example, can offer you a Flex Modification Program if you are eligible. Credit card issuers and banks may also offer short-term payment modification programs to make repayments easier.

You’ll need to send a financial hardship letter to demonstrate your needs. This letter is an explanation of the circumstances affecting you and how they are impacting your ability to pay. 

Many of these programs offer debt forbearance, reduced payments, and interest waivers. Take the time to understand the full details of the programs to ensure you are aware of any applicable fees.

4. Negotiate your Debts

If you’ve accumulated a large amount of debt from personal loans and credit cards, consider debt settlement. Contact a company specializing in negotiating settlements with lenders. They may be able to convince your lenders to accept a lump sum settlement amount in return for alleviating your entire balance. This can allow you to save up to 50% of your total debt before fees.

5. Find Ways To Earn Extra Income

Start a part-time job on the weekend or a side gig to earn some extra cash during your free time. This can be a major help during financial hardship, and abundant part-time remote positions make it easy to work from the comfort of your own home. A side gig can be a temporary solution to aid you in getting ahead, or it can be the start of a permanent business that you can run for years. 

You can try to find work in industries that often hire temporary employees, such as customer service, food and package delivery, or retail sales. Any extra money you earn should go towards clearing off your bills and debt repayments.

6. Seek Help From a Professional

If you’re unable to manage your situation on your own, professional help is always available. Contact a credit counseling company for more education on how to create and stick to a budget, as well as the best ways to manage your financial obligations. Professional counselors can take a look at your finances, debts, and budget to provide you with suggestions that work for your situation.

Consider enrolling in a debt management program. Your counselor can negotiate with your lenders to reduce your interest rates or waive penalties and fees. Once you enroll your debts into the program, you will make regular payments each month to the debt management company, which will distribute your payments to your creditors on your behalf, making sure they are in the proper amounts and are each paid by their respective due dates.

How To Claim Financial Hardship

If you’re having trouble keeping up with debt repayments because of financial hardship, you can contact your lenders to discuss your options. Most lenders have a hardship department. You can email, write, or call them about setting up a repayment modification arrangement. This communication is known as a hardship notice.

Once you provide a hardship notice, the lender must stop legal action or debt collection against a borrower until that lender responds to the borrower’s notice, asking him/her for additional information to support the claim of financial hardship. You may be asked to provide further details such as:

  • Income details (i.e., How has your income changed in recent weeks/months?)
  • Expense details  (i.e., What do you owe on your debts, and what are your normal living expenses each month?)
  • Cause or evidence of financial hardship (e.g., illness or unemployment)

Be proactive and reach out to lenders if you are at risk of falling behind on credit card debt, auto loan, mortgage, or student loan payments. Missing payments or defaulting on your normal payments can lower your credit scores. 

If your account goes into collections, it can have a major impact on your credit report. Many lenders are willing to work with you to adjust payments temporarily when you communicate your needs.  No matter how good a financial position you are in now, it doesn’t take much to derail your short and long-term financial plans and land you in a position of financial hardship.  

It can happen to anyone at any time, and most lenders realize this, so they are usually open to adjusting your repayment plan accordingly.  You just have to be proactive about it and let them know about it before it becomes a problem you can’t easily dig out of.

5 Causes of Financial Hardship

There are many unforeseen events in life that can negatively impact your finances and your ability to repay debts. Some of the most common causes of financial hardship are:

1. Job Loss

Unexpected job loss can be financially devastating. While you may receive severance compensation for a layoff and unemployment benefits, this type of compensation typically only covers your expenses for up to a few months.

If it takes longer than expected to find a new job, you may find it difficult to keep up with your expenses without a financial buffer.

2. Death of a Spouse

Losing a family member or spouse can be emotionally and financially draining. When a family member dies, there is an immediate drop in the family income. 

This can make it difficult to meet financial obligations if there are no other financial protections in place, like life insurance. If the deceased person had outstanding debt, you might even end up with additional financial responsibilities.  

3. Foreclosure and Eviction

Not being able to keep up with mortgage payments can also cause financial hardship. Once you are 120 days past due on payments, your mortgage lender can start the foreclosure procedure. If you are renting and are evicted from your home for non-payment of rent, you may experience additional stress when arranging for new accommodations.

4. Medical Expenses

When you’re faced with an unexpected accident or major sickness, you may end up with a large medical debt. You may also lose your income while you’re recovering. Temporary disability benefits are available, but they may not cover all of your expenses and medical bills at the same time.

5. Funeral Expenses

In 2021, the average cost of a funeral was $7,848. Many families have difficulties paying for funeral costs. This added expense could make it difficult to pay your other bills when a family member passes away, adding to your financial problems.   

Know Your Financial Rights

Know your rights and the options available to you in case of financial difficulty. Here are some resources for assistance:

Taxpayer Bill of Rights

If you’re dealing with the IRS, you have the right to retain representation and challenge the IRS’s position. The Taxpayer Bill of Rights lists the fundamental rights available to every taxpayer.

The Taxpayer Advocate Service is an independent organization within the IRS that offers additional tax assistance and resources. They can help you with tax returns, child credits, free tax counseling, and more.

Federally Funded Legal Assistance

If you have legal issues along with financial hardship, representation can be very expensive. See if you are eligible for legal aid programs designed for those who cannot afford representation. The American Bar Association can match you with volunteer lawyers who provide free legal help on a “pro-bono” basis.

The Mortgage Debt Relief Act

If you have any mortgage debt forgiven on your primary residence, you may be able to exclude it from your tax obligation. Mortgage debt that is forgiven due to foreclosure or reduced due to restructuring is eligible for an exemption from taxation as ordinary income or otherwise. Any debt forgiven from 2007 to December 31st, 2009, is eligible under the Mortgage Forgiveness Debt Relief Act of 2007. Debts up to $2 million are eligible for exclusion from gross income.

Student Loan Assistance

The U.S. Department of Education offers many payment plans for federally funded student loans. Loan consolidation, income-driven plans, and other loan repayment plans can help you manage your student loans while you navigate financial hardship.

In some cases, you may also be eligible for student loan forgiveness. If you are a teacher or in a public service occupation, you may qualify for discharge, cancellation, or forgiveness of loans.

Federal Tax Assistance

If financial hardship has affected your ability to pay federal income taxes, options like the federal tax repayment plan can help. You may be eligible to set up a monthly installment agreement with the U.S. Treasury. 

The IRS also offers provisions for those affected by natural disasters. There are many tax debt relief options available, depending on your unique circumstances.

How To Use Your Retirement Account for Financial Hardship

If you have a retirement account, you may want to take a loan or withdraw funds to pay your debts and normal living expenses during a period of financial hardship. You can receive a hardship distribution from your 401(k) or other employer-sponsored retirement plan to ease your financial burden.

With this program, you may be able to use cash funds from the retirement account to cover unexpected medical expenses or to avoid foreclosure. You’ll not be required to pay the funds back. Another option is to take out a non-hardship loan from your employer-sponsored retirement plan.

The resources listed above will help you navigate financial hardship and get back on track. Regardless of your situation right now, remember that it is only temporary, and financial hardship can happen to practically anyone in this day and age.

If you need professional guidance about how to manage debt, TurboDebt can help. Our counselors can provide strategic planning, advising, and consulting services so you can find a debt relief program that is right for you. Connect with us for a free consultation today.

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