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When you are having trouble with your credit payments, declaring financial hardship can prevent you from having to file bankruptcy. A hardship will allow you to restructure most debts so you can afford the payments. There are certain situations when a creditor may forgive a portion of your debt, and this usually depends on the reason for your hardship. If a creditor does not forgive your debt but offers to restructure the payments, you will still have to pay the amount that you borrowed, just for a longer period of time. The alternative may be filing for bankruptcy, so you may have to take whatever offer you get from a creditor. If your financial situation improves, you can always increase the amount you are paying so the loan gets paid off early.
Declaring Financial Hardship
You must draft a letter for each creditor, explaining why you intend to declare a financial hardship. Here are a few things you can put in the hardship letter:
- Account number and contact information
- Reason for the hardship
- Temporary or permanent hardship
- Amount you can afford to repay
- Current employment information
Tailor each letter you compose to the specific creditor. Try not to use a generic letter to describe your current hardship. Either mail or hand deliver the letters to your creditors. Then, contact them in a few days if you have not received a reply.
Restructuring Your Debts
Once your creditors review your hardship request, they will offer partial debt forgiveness, a payment restructure plan, or refuse to change your payments at all. This depends on the creditor, and the reason for your hardship. For example, if you are now permanently disabled, you may receive some debt forgiveness from one creditor, and a new payment plan from another.
When you have receive a response from all of your creditors, calculate the total amount of the new payments. If the total is still too much for you to afford, identify the creditors that gave you the smallest reductions. Contact them to try and have that amount amended.
You have done your best to explain the reasons for your hardship with each of your creditors. Many will agree to workout a payment plan to allow you to fulfill your obligation to them. However, there may be some creditors who are not willing to help you at all.
You will have to decide whether or not to default on a particular debt. Your home and car loans are the highest priorities, so you must continue to try and make those payments. If your mortgage or auto lender will not modify your loans to lower the payments, you will probably need to default on some of your revolving debt in order to keep your home and vehicle.
Even if some of your revolving creditors have agreed to lower your payment amount, you may need still to default with one or more of them. The alternative may be to file for bankruptcy.
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