Financial Hardship Arrangements
Financial hardship refers to a financial situation where one is unable to meet their day-to-day living expenses and repay their debts. If such financial hardship is due to involuntary causes, such as loss of job or an illness, then a debtor can speak to their creditor and enter into a financial hardship arrangement. Here, it is important that the financial hardship is only temporary in nature, that is, the debtor/borrower has reasonable belief that his financial situation can improve in the short-term, by way of finding of a new job or recovery from illness.
As per the financial hardship arrangement between you and your creditor, any of the following modifications may be applied to your credit terms:
- Temporary stop on payments
- Temporary freezing of interest
- Only interest-based payments for the short-term
- Paying smaller amounts of money for the short-term
As a debtor, it is very important that before approaching the creditor to enter into such an arrangement:
- You ascertain your period of financial hardship, in terms of how long will it take for you to find a new job, or to recover from your illness
- You ascertain the amount that you will be able to pay over the period of the arrangement (it is vital that you do not promise to pay an amount that you cannot deliver)
- You ensure that such financial situation is not long-term or permanent, because if such is the case then the creditor may deny entering into a financial hardship arrangement
Financial Hardship Arrangements – The Process
Once you have gone through the above drill, the next step is to call your lender, explain the whole situation, and negotiate your terms for a financial hardship arrangement. These days banks, credit card companies, utility service providers, and others, have a separate “Hardship Department” to manage such customer requests. After completing the call, send a written application of the terms of the arrangement to your creditor. The creditor must respond to it in 21 days. The lender must provide you with a reason in case he rejects your application. And if you feel that the reason for rejection is unfair, then you can take up the matter with the Ombudsman Services.
Financial Hardship Arrangements – Advantages
Financial hardship arrangements are generally made for periods between 3 months and 1 year. Their main advantages are:
- They provide relief from debt, even if just for a short period.
- Unlike other debt solutions such as bankruptcy and debt agreements, they do not damage one’s credit history.
- Creditors are more co-operative to enter into such arrangements as opposed to bankruptcy, because in case of bankruptcy, there is no guarantee that the creditor will be able to recover the full debt amount, whereas in a financial hardship arrangement, the creditor is assured of full recovery, albeit slowly.