How To Deal With Financial Hardship
10 MIN READ
Published April 07, 2023 | Updated October 02, 2023
The stress from financial hardship can impact anyone. But there’s almost always a solution. Explore the different ways you can overcome financial difficulties and find help in difficult times.
The way to financial health is a long journey with many challenges along the way. A global pandemic, sudden emergency, medical expenses, or unemployment can quickly push you 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. But only 50% of Americans have access to employer-sponsored retirement plans. Among those, only half participate. Thankfully, there are many solutions available to recover from financial troubles and reach a point of stability.
What Is Financial Hardship?
Financial hardship is when you are willing to pay your debts but are unable to because of 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 IRS, financial hardship occurs when paying your tax debt prevents you from meeting reasonable, basic living expenses. Allowable living expenses include:
- Food, personal care items, and housekeeping supplies
- Housing expenses and utilities
- Out-of-pocket medical expenses
How to Claim Financial Hardship
If you are 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 making a repayment arrangement. This 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 they respond. You may be asked to provide further details such as:
- Income details
- Expense details
- Cause or evidence of financial hardship
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 loans 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.
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, they typically only cover 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 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 evicted from your home, you may have the additional stress of arranging for new accommodations.
4. Medical Expenses
When you are faced with an unexpected accident or major sickness, you may end up with a large medical debt to cover. You may also lose your income while you are recovering. Temporary disability benefits are available, but they may not cover all of your expenses and medical bills.
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, adding to your financial problems.
What To Do When in Financial Hardship
Here are a few key steps you can take to improve your financial situation and get your life back on track:
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 adjust your budget based on this reduced income.
If you had no income coming in and leveraged debt to get by, you can speak to a debt relief company to create a plan for monthly payments so 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.
Contact Your Service Providers
Many utility and service providers are willing to accommodate you if you are 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.
Explore Hardship Programs Offered by Lenders
If you have any type of debt, contact your lenders to see if they offer 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 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 it is impacting your ability to pay.
Many of these programs offer 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.
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. This can allow you to save up to 50% of your total debt before fees.
Find Ways to Earn Extra Income
Start a part-time job on the weekend or a side gig to earn some extra cash. This can be a major help during financial hardship. It can be a temporary solution to aid you in getting ahead. You can try to find work in industries that often hire temporary employees, such as customer service, delivery, or retail. Any extra money you earn should go towards clearing off your bills and debt payments.
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. 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 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, make regular payments each month.
Know Your 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 are 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.
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. Any debt forgiven from 2007 to 2017 is eligible under the Mortgage Forgiven Debt Relief Act of 2007. Debts up to $2 million are eligible.
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 government taxes, options like the federal tax repayment plan can help. You may be able to set up a monthly installment agreement if eligible. The IRS also offers provisions for those affected by natural disasters. There are many tax debt relief options available, depending on your unique circumstances.
Financial Hardships and Retirement Accounts
If you have a retirement account, you may want to take a loan or withdraw funds during financial hardship. You can receive a hardship distribution from your 401(k) plan to ease your financial burden.
With this program, you may be able to remove funds from the 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 the retirement plan.
The resources listed above will help you navigate financial hardship and get back on track. Regardless of what your situation is right now, remember that it is only temporary.
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.