What is Financial Hardship?

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Financial hardship usually refers to a situation in which a person cannot keep up with debt payments and bills. This particular term is also used in decision-making processes about whether to offer someone relief from certain types of payment obligations.

Different programs make hardship decisions based on different criteria.
(David Sacks/Photodisc/Getty Images)

Financial hardship can occur for many reasons. In some cases, people struggle to find employment for an extended period of time and bills pile up. People scheduled to come off of assistance programs or begin paying debt may also experience hardship in adjusting to the sudden change in financial structure.

Typically, when an organization makes a judgment on the merits of a person's financial hardship, the focus is on the overall financial picture and reasonable nature of the request. When people apply for government assistance programs such as welfare or food stamps, for instance, they must complete applications and explain how they meet hardship requirements on certain financial criteria.

Financial hardship is often mentioned in relation to student loans. A college student who used loans to fund her education usually begins paying off the loans shortly after graduation. For some, this major expense arrives before they have a chance to earn a decent living. One option is to request a 12-month deferral on payments based on financial hardship. Other types of lenders may listen to hardship requests as well.

In some cases, the Internal Revenue Service allows elective retirement programs -- including 401(k) plans, 403(b) plans and 457(b) plans -- to make hardship distributions without normal early withdrawal tax penalties. The decision on hardship typically relates to the reason for the request. For example, medical and funeral expenses are common allowances, according to the IRS website.

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