Understanding Hardship Default – Problems And How To Avoid It

What is a Hardship Default?

Hardship Default is a situation that occurs when you experience a financial hardship which makes it difficult to meet up with your payments on credit cards, loans, and other debts. When you are in default on a debt, it means that you have not made payments for a specified period of time, as determined by the lender and/or the type of debt involved.

Understanding Hardship Default

Understanding Hardship Default

When you are hit with financial hardship, it can make paying debts as well as everyday expenses more difficult if you do not have sufficient income or savings that can take care of your bills. Financial hardships can occur because of the following circumstances:

  • Illness
  • Injury or disability
  • Loss of job
  • Unexpected expenses
  • The demise of a breadwinner.

In an event where hardship occurs that reduces your ability to repay debts as well as other bills which can increase your risk of defaulting. You may come up with default when you miss payments on a debt, which requires collateral, and unsecured debts.

Default timing can be different, depending on the kind of debt.

Problems of Hardship Default

Hardship default comes with several side effects that you can experience if you default on credit cards or loans. It can start with your creditors taking debt collection actions against. This may include:

  • Sending you letters prompting you to make payments.
  • Calling you with requests to make payments.
  • You can be sued in small claims court for the amount owed.
  • Garnishment of wages or bank accounts where a lawsuit is successful.

Note that there are certain rules that debt collectors must adhere to under the federal law. Thus knowing your rights can help you protect yourself against unfair debt collection.

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Secondly defaulted debts can be reported to each of the three major credit bureaus. FICO credit scores, which are the most commonly used credit scores, use payment history as the main determinant factor of your score. When you miss or make late payments, defaults and collection accounts can all cause your score to take a downturn.

Once your credit history is damaged by default, you find it difficult to get approved for new loans or lines of credit. Even when you get approved, you may be faced with higher interest rates for the money you borrow, which makes your debt more expensive.

How to Avoid Hardship Default

If you are facing a hardship default, there may be options available to you that you can help you in in order to avoid default. The options include:

Credit Card Hardship Programs

These programs are designed to help borrowers avoid default. This is done by reducing or pausing credit card payments, which lowers your APR and waiving certain fees, like late penalties. Most credit card issuers offer these programs. Even though qualification may be determined depending on the case at hand.

You may have to consider this option if you are unable to make the minimum payments on your cards. However, you may have to offer proof of your financial hardship in order to qualify for credit card debt relief.

Student Loan Forbearance and Deferment

These are programs that can help when you have federal student loans and you can’t make the payments. Both of these programs allow you to pause payments temporarily.  Their difference is in how interest is capitalized on the loans.

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In the case of a deferment, the interest that accrues on your loans is paid by the federal government for subsidized loans. However, you will still be required to pay interest that accrues on unsubsidized loans. Now during a forbearance period, you’d be required to pay for all of the interest that capitalizes on your loans.

In case you are already in default on federal student loans, you may be able to bring them current by rehabilitating them or having them consolidated. Then you could make payments more manageable by switching to an income-driven repayment plan.

Mortgage Modification and Forbearance

Where you can’t make your home loan payments you also have options for avoiding default and eventual foreclosure.

Mortgage forbearance is much like a student loan forbearance because you can pause making mortgage payments temporarily. Even if interest and fees accrue on the loan during this time.  How you make up missed payments based on the terms of your lender’s forbearance program.

If you do not think forbearance or a loan modification is the right option for you, you could also try refinancing your mortgage to a lower rate. Now, this can help in reducing your monthly payments. As well as minimize your chances of defaulting as a result of a too-high payment.

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