Hardship plans or programs are often offered by the banks when consumers are unable to keep up with their payments. Banks offer hardship plans to those consumers who are facing serious financial hardships.
Check out the following sections to know more about hardship programs.
Hardship plan - What it is all about
Hardship plans or programs have developed to assist the ailing debtors. These programs help the debtors to pay off their debts at reduced interest rates. The monthly payment amount of the creditors is lowered after the debtors qualify for the hardship plan or program. The debtors can pay a fixed amount every month for a certain period of time and make the debt repayment process faster.
2 Types of hardship plans
Depending on the bank, your financial ability to commit to a payment, how far behind in payments you are, a hardship plan may look something like this:
- Temporary hardship plans - These plans are typically set for 6 or 12 months. Your monthly payment can sometimes be reduced to 2% of your current balance. Your interest rate is reduced to anywhere from zero to 9%. Fees and penalties are often waived. When the plan expires your billing will reset to the pre-plan arrangement. This may be the temporary payment relief you need.
- Long term hardship programs - These became more common when the economy fell off a cliff. They are still made available by many of the larger credit card issuers today. Your balance will be frozen and the account closed. Your payment will be amortized over 5 years (60 months) similar to the temporary plans of 2 to 2.5% of the current balance set as your monthly payment.
Hardship plans - Things you need to be aware of
When you're already behind in payments and you either call the creditor yourself, or pick up one of the many calls that will be placed to you in an effort to establish a payment plan, you'll be asked qualifying questions. The questions center on your monthly income and what you pay out each month for bills. You may be asked what you pay for rent or on your mortgage, what you pay for cell phone, utilities, internet etc. How you respond will impact what plan you qualify for, or whether you are offered a reduced payment plan at all. If your monthly cash flow shows no money available after essentials are met, you obviously cannot reasonably commit to any plan, no matter how good the terms. If the income and expense exercise shows too much excess and available money, the payment plan offered may not be as favorable.
Creditors offering a 5 year hardship repayment plan may require you to recommit to the plan every 12 months.
3 Benefits of hardship plans
Additional benefit to a hardship plan may include:
- Depending on how many months you have missed payments; your creditor may agree to "re-age" the account after 3 or more timely payments on the plan. This means they may consider removing the 30, 60 or 90 day late pays from your credit report.
- There are limits to re-aging. As a general rule, once your account is charge off, you will find you have reached a point where re-aging is not an option.
- Whether you work with a credit counseling company and enroll in a debt management plan, or work out hardship payment plans with creditors on your own, you will want to establish the plan prior to having missed 5 payments. This time frame is encouraged in order to avoid accounts charging off wherever possible.
Hardship plans - 2 Drawbacks you need to know
The 2 main drawbacks are given below:
- Available to delinquent creditors: Hardship plans are typically only offered to those who are behind with their credit card payments. If you are current and call inquiring about a hardship plan you are basically saying you are at risk of defaulting on payments. This can result in their lowering your available credit limit or even closing the account. If you still have options to meet your scheduled monthly payments, I would not recommend calling your creditors to discuss your hardship. This strategy should be reserved for the creditors you are unable to pay on time.
- Some creditors don't offer the plan: Some smaller credit issuers, like store and gas cards may not offer consumer hardship plans, but do allow them through a credit counseling agency.
If you don't want to opt for DIY credit counseling or bank sponsored hardship plans, then enroll into a credit counseling program to solve your debt problems.