What Is Hardship Default?
A hardship default can occur when you experience financial hardship that makes it difficult to keep up with your payments on credit cards, loans, and other debts. For example, being laid off from work or losing your job entirely could constitute financial hardship if you don't have savings or other means to replace lost income.
Being in default on a debt means that you haven't made payments for a specified period of time, as determined by the lender or the type of debt involved.
- Your lender and the type of debt involved can determine how many payments must be missed before a debt is considered to be in default.
- Defaulting on credit cards or other debts can cause significant damage to your credit score, making it more difficult to borrow money or qualify for the lowest interest rates.
- Credit card and loan hardship programs can help you avoid defaulting on debts and potentially make your payments more manageable.
- Bankruptcy could be considered a last-resort option for managing debt if you've defaulted or are in danger of default.
Understanding Hardship Default
Financial hardship can make paying debts and everyday expenses more difficult if you don't have enough income or savings to cover your bills. Financial hardships can be triggered by a variety of circumstances, including:
- Injury or disability
- Job loss or extended layoffs
- Unexpected expenses
- Death of your household's primary breadwinner
When a hardship occurs that reduces your ability to pay debts and other bills, that can increase your risk of defaulting. Default can occur when you miss payments on a debt or stop making them altogether. You can be in default on both secured debts, which require collateral, as well as unsecured debts.
The timing for when default occurs can be different, based on the type of debt. With credit cards, for example, you may be in default after missing six months of payments. For federal student loans, default happens when you become 270 or more days behind on payments.
Default and delinquency sound similar but they aren't the same. You can be delinquent on a debt by missing a single payment, while default is associated with a series of consecutive missed payments over time.
Consequences of Hardship Default
There are several side effects of hardship default you may experience if you default on credit cards or loans. The first is that your creditors may initiate debt collection actions against you. That can include:
- Sending you letters asking you to pay
- Calling you with requests for payment
- Suing you in small claims court for the amount owed
- Garnishment of your wages or bank accounts if a lawsuit is successful
There are certain rules debt collectors must follow under federal law. For example, they can't call you before 8 a.m. or after 9 p.m. without your permission. Knowing your rights can help you protect yourself against unfair debt collection practices. If you think you've been unfairly treated or had your rights violated by a debt collector, you can file a complaint with the Consumer Financial Protection Bureau.
Defaulting on federal student loans could also result in the federal government offsetting your tax refund. If you're owed a refund, that money could be paid to the Treasury Department to pay back your outstanding debt.
Another consequence involves your credit score. Defaulted debts can be reported to each of the three major credit bureaus. FICO credit scores, which are the most widely used credit scores, use payment history as the chief determining factor of your score. Missed or late payments, defaults, and collection accounts can all cause your score to drop.
When your credit history is damaged by default, that can make getting approved for new loans or lines of credit difficult. If you are able to get approved, you may pay higher interest rates for the money you borrow, making your debt more expensive.
Avoiding Hardship Default
Defaulting on a debt doesn't have to be a foregone conclusion. If you're struggling to keep up with your payments, there may be options available that can help you manage your debts and avoid default. Those options include:
Credit Card Hardship Programs
Credit card hardship programs are designed to help borrowers avoid default by reducing or pausing credit card payments, lowering your APR, and waiving certain fees, such as late penalties. Many credit card issuers offer these programs, though qualification may be determined on a case-by-case basis.
A credit card hardship program could be an option to consider if you can't make the minimum payments on your cards. You may have to offer proof of your financial hardship to qualify for credit card debt relief.
If you don't qualify immediately, you can consider working with a debt relief company. It can help you negotiate a lower rate and reduce your outstanding debt with the credit card company.
Student Loan Forbearance and Deferment
Student loan forbearance and deferment programs can help if you have federal student loans and you can't make the payments. Both allow you to pause payments temporarily; the difference is in how interest is capitalized on the loans.
President Biden extended the forbearance period on most federal student loans through Dec. 31, 2022. After a federal court blocked the White House's student loan forgiveness program in 2022, the Biden administration extended the pause on payments again. Eligible borrowers have through 60 days after June 30, 2023, (or 60 days after litigation blocking the White House's student loan forgiveness program is resolved, whichever is earlier) before payments resume.
Whereas with a deferment, the interest that accrues on your loans is paid by the federal government for subsidized loans. You would still pay interest that accrues on unsubsidized loans. During a forbearance period, you'd be responsible for paying all of the interest that capitalizes on your loans.
If you're already in default on federal student loans, you may be able to rehabilitate them or consolidate them. You could then make payments more manageable by switching to an income-driven repayment plan, which stretch out payments over a term of 20 or 25 years. After this period, so long as you make all of your qualifying payments, whatever balance is left on the loan is forgiven.
Deferment and forbearance apply to federal student loans, but private lenders are not required to offer them. If you have private student loans, you'll need to contact your loan servicer or lender to find out what kind of relief, if any, might be available.
Mortgage Modification and Forbearance
If you can't make your home loan payments, you also have options for avoiding default and eventual foreclosure. A loan modification, for example, would allow you to rework the terms of your mortgage loan to make your payments better fit your budget.
Mortgage forbearance is similar to student loan forbearance in that you can pause making mortgage payments temporarily. Whether interest and fees accrue on the loan during this time and how you make up the missed payments depends on the terms of your lender's forbearance program.
If forbearance or a loan modification isn't an option, you could also try refinancing your mortgage to a lower rate. This could help reduce your monthly payments and minimize your chances of defaulting because of a too-high payment.
When taking advantage of hardship deferment or forbearance programs, ask your lender or creditor how it will be reported to the credit bureaus. If missed payments aren't reported properly, that could end up hurting your credit score.
The Bottom Line
The worst thing you can do if you're experiencing financial hardship is to neglect your debt altogether. Though you may not be able to make payments toward what you owe, it's important to remain in contact with your creditors. They can help you consider solutions for keeping your debts current to avoid credit score damage, debt collection lawsuits, and other negative impacts associated with default.