Credit Card Hardship Strategies

Nearly all the major U.S. credit card issuers maintain credit card hardship programs. They are meant to assist card holders in paying their debts. The basic idea is to avoid default and bankruptcy at any cost. A hardship program allows the bank to help you get back on track financially so you can continue paying them.

Features

The main features of a credit card hardship program are the lowering of interest rates and minimum payments for a specific period of time, usually from six to 12 months in response to a personal tragedy. A loss of a job, divorce, family death and other "life changing events" are the normal causes for financial hardship strategies. Hardship will not eliminate any of the debt (though there are exceptions) and it will close your credit card account for a time.

Function

The purpose of these programs is to keep the debtor from declaring bankruptcy. Because credit card debt is unsecured by any collateral, bankruptcy will wipe this debt out completely. Banks would like at least some of their money back, and therefore, they are willing to negotiate with those facing legitimate hardship.

Strategies

When applying for credit hardship, use the word "bankruptcy" a lot. These programs exist primarily to avoid bankruptcy. If you threaten to declare it, the banks are out the money. Using this word often in your interview will help your case. Second, show that your use of the credit card has been moderate. Excessive spending will get you a quick rejection from a hardship program. Third, the hardship you report must have a clear connection to your financial situation.

Approaches

Have all your data when you go for your interview. When you apply for a hardship program, the bank will want to speak to you in person. Have your financial papers with you, as well as proof of the hardship cause and its effect on your finances. Remember: You cannot max out your credit card and then claim hardship. Banks are wary about this. You must have hard proof of a "life changing event" and its effect on your finances to quality for these programs.

Misconceptions

If you are lucky enough to get your principal reduced by the bank, be aware that the Internal Revenue Service considers this forgiven debt as income, and you will have to pay taxes on it. Furthermore, the hardship program will affect your relationship with the bank and your credit score. Of course, it is not nearly as bad as having a bankruptcy on your credit report, but it will still negatively affect your credit. Once you get back on your financial feet, you can apply to get your credit card reactivated.