Editorial Policy

Hardship plans work only if you'll be on your feet soon

Erica Sandberg

September 1, 2015

QHi Erica,

I went to a credit counselor after being laid off and could not pay my bills. They could not let me use the Debt Management Program and told me to call my credit card company to ask for help. I owed Bank of America almost $4,000, and they let me pay $50 for six months from my unemployment. I think I made everything worse, though, because my balance is much, much bigger, and my credit is ruined. My score is 566. Should I have not taken that advice? — Kimberly

ADear Kimberly,

Credit counseling agency advisers aren't miracle workers and are limited with what they can do. Yes, they will assist their clients by reviewing income and expenses and develop a budget based on those numbers. After that, they'll determine if there's enough cash left after covering basic expenses to go toward creditor payments. At that stage, the counselor will suggest the person either self-administer the accounts, or the counselor will recommend an agency-managed debt management program or DMP.

However, like many clients, you were short of funds to participate in the DMP. It's more important for you to cover necessities, such as rent and grocery bills, than unsecured debts. Therefore, the counselor had to suggest other options. A hardship plan is a common one, and it seems as if this is what you did. Yet this prescription is not without negative side effects.
Ask Erica

Hardship plans are made between the customer and the credit card company. As the cardholder, you ask if they'll accept small (sometimes called “good faith”) payments for a specific timeframe. If accepted, the company will hold off on collection notices, and won't sell the debt to a collection agency. Some people have successfully negotiated a suspension of interest during that time and for the company to report the account positively on credit reports, though such agreements are not common.

In your case, it appears that Bank of America has been adding finance fees, and possibly at a higher interest rate than before you fell behind. Chances are it also notified the credit reporting agencies that you were not paying according to the original terms of the contract. Each month that you sent less than the minimum, a late payment was added to your credit file. As the fees piled on, your debt edged ever closer to your credit limit. It's not surprising that your FICO score declined dramatically, since payment history and credit utilization (the amount you owe in relation to the amount you can borrow) comprises 65 percent of the score.

Hardship arrangements are worth trying, but only if you will be back on your feet by the end of the plan. After all, it gives you the opportunity to secure a job or deal with other issues while knowing your account will be in a somewhat safe spot.

If you are working now, contact Bank of America and explain that you're ready to send normal payments again. If you can pay more, even better. Request a lower interest rate while you're at it. You may be declined, but it can't hurt to try. Once your timely payments are again recorded and the balance begins to fall, your scores will rebound.

On the other hand, if you're still not working and there is little chance that you'll have enough coming in to satisfy the minimum payments (and money is so tight that you will struggle to eat and stay in your home), the hardship plan only delayed the inevitable: charge-offs, collection action and possibly a lawsuit. In such circumstances, bankruptcy might have made more sense.

I hope you are now employed and earning as normal so that you can take care of this matter quickly!

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