How to Write a Financial Hardship Letter

The COVID-19 pandemic undoubtedly caused a major impact on the entire country. Some individuals have been furloughed, while others have been laid off. Additionally, others have become infected with the virus, resulting in high doctor’s bills or other financial hardships.

Certain circumstances can qualify for financial hardship. Writing a financial hardship letter to creditors can help individuals pursue options in paying down their debts after missing payments because of these hardships.

Writing a financial hardship letter isn’t difficult. Here’s what you need to know if you feel that you’ve experienced financial hardship because of a circumstance beyond your control.

What Qualifies as a Financial Hardship?

Certain life circumstances can qualify as ‘financial hardship.’ According to Credit.org, examples of these circumstances include:

•     Illness/injury
•     Your employment status changes (maybe you’re suddenly part-time…or unemployed)
•     Income loss
•     A natural disaster (e.g. earthquakes, floods, etc.)
•     Divorce
•     Death
•     Military Deployment

The goal of a financial hardship letter is to inform your lender of your particular circumstances and explain why you have been unable to meet your payment obligations. A financial hardship letter should pose a resolution to the debt in some manner. This doesn’t always mean paying the balance off in one payment, but simply proposing other ways to help make the account current or tackle the debt.

What Resolutions Can Debtors Suggest?

There isn’t one resolution that works for every debtor. Ideally, debtors should review their account and find some type of resolution that could work for their circumstance. It should be noted that not all lenders will be able to agree to the requested changes. The letter could suggest:

•     Asking for a lower interest rate
•     Pursuing a loan modification
•     Settling the debt (perhaps proposing lower amount that will be paid in one sum)
•     Short sales (for mortgages)
•     Asking for a lower minimum payment
•     Finding a way to make the account current
•     Suspending delinquent payments (i.e. ‘past due amounts’)

The Body of the Letter

The hardship letter needs to explain to the lender what circumstances have affected your ability to pay and how these circumstances have affected your financial situation. Be transparent about your situation, and make it clear that you want to work with the lender to pay down the account.

Mortgage Relief Project states that your request and proposed solution should be included at the beginning of the letter. Then you should explain the hardship and circumstances. According to The Mortgage Relief Project, “A typical lender will spend less than five minutes reading your letter. Keep it to a single page.”

Additionally, the Mortgage Relief Project notes that the end of the letter should include restating your request. Another tip? Be humble and honest. Remember, the letter is asking the lender to work with you. Disclose your circumstances–don’t point fingers as to why you’ve fallen behind–try to understand that the individual reading your letter is likely reading many letters and doesn’t have time for drawn out explanations.

Hardship & Tax Refunds

Financial hardship could have caused you to fall behind in paying bills, but you also could be expecting a refund from your taxes. Perhaps you’re still waiting on your stimulus check. The IRS may be able to help you receive your refund faster if you explain your hardship.

Per the IRS: “If you are facing a hardship, like a financial hardship (can’t buy medicine, can’t pay mortgage or rent and received an eviction notice, can’t pay utilities and got a shut off notice, etc.) and you need your refund sooner, the IRS may be able to expedite the refund.”

While the IRS is typically fairly efficient at issuing refunds, they can sometimes be delayed. If you need the refund now—because of hardship—contact the IRS and explain the situation. As for a missing stimulus check, CNET explains your options.

What if You Owe Back Taxes? Can You Claim Financial Hardship?

Owing back taxes can put a serious strain on your financial situation. The IRS website explains that a refund can be withheld to pay back taxes on your account, although exceptions can be made. If you owe money to the IRS for back taxes and have experienced a financial hardship, what are your options?

Typically, the IRS is willing to work with taxpayers. Call the IRS immediately when you are having trouble paying back taxes. A payment plan may be established that works with your financial situation. The TaxAct Blog also explains that you also may be able to resolve the debt with an “offer in compromise.”

Owing money to the IRS is scary, but you should not—and cannot—just ignore the debt. Contact the IRS or consult a tax attorney to figure out your options.

Some debtors may wait until an account goes into default or they are being chased by creditors to pursue financial hardship options. Avoid delaying reaching out to a creditor.

Transparency and communication are the best options. Once you experience a major life change and it becomes clear that you’re unable to make payments—or you have fallen behind—reach out to your creditors.

Sometimes a financial hardship letter isn’t necessary; call your lenders and see what you can negotiate related to your debt. Some creditors may allow you to make a lower payment or work with you in other ways. Your lender or creditor may need proof of your hardship, and you may be asked to send a letter or perhaps other documentation. When you manage debt delinquencies promptly, the weight of the debt stress can lighten a bit.

If your financial stress is tied to COVID, there are options. A story from CNBC quoted a credit expert who explained that the word to use when dealing with credit card companies is “accommodation.” When calling credit card companies because of financial hardships caused by COVID (maybe you lost a job, etc.), the article explains that you should ask for “a coronavirus accommodation.” Understand though, that some companies may offer different options.

What to Remember

Creditors want their money, but most of them don’t want to have to pursue lawsuits or other legal maneuvers to get their money. These are often the last line of defense to get a debtor to pay what is owed. Be honest and transparent with your creditor.

Once you find that you’re in over your head because of a hardship, call your creditors. Then, if needed, provide the documentation (including a letter of hardship) that they may need to work with you on your debt. You may be able to lower your monthly payments, settle the debt for less, modify the loan or find another solution that works for both you and the creditor.

While falling behind on payments is stressful, the tension only increases when you ignore the debt. Be honest with creditors, state your case and explain how you can make the debt current. When you reach out promptly, your creditors may be more open to working out a solution that will satisfy the debt that is owed.