How to Prove Financial Hardship

The phrase "financial hardship" is highly subjective. Not only may you and your creditors as a group view the phrase from different perspectives, but each creditor may also define the phrase differently. Understanding the criteria and documentation required to substantiate a hardship situation is vital to taking advantage of available debt relief programs. Creditors as varied as the federal government or a credit card company often offer full or partial debt relief if you can prove that your financial situation is dire.

In general, a financial hardship situation is one that forces you to either decide between meeting basic living expenses or paying your bills. To prove this, a creditor requires information about your income and expenses. While the specific requirements may vary between creditors, this often includes:

• Pay stubs or a W-2 Wage and Tax Statement
• Income tax returns for the past one-to-three years
• Property tax bills
• Checking and savings account statements for the past three-to-six months

While basic information is enough to substantiate your situation with some creditors, others require additional documentation. For example, disclosure requirements to claim financial hardship and to avoid a federal tax offset by filing IRS Form 433-A or a student loan offset by filing a Financial Disclosure Form are significantly more stringent. They include:

• Mortgage loan documents or your lease agreement
• Copies of bills for monthly expenses such as utilities, telephone, transportation, insurance and child care
• A copy of the court order for child support or spousal support payments
• Copies of hospital and doctor bills

A specialty program such as a 401(k) hardship distribution, if one is available, only requires that you prove a specific situation is causing an "immediate and heavy financial need." Because you can only withdraw the amount necessary to meet the need and pay any associated taxes or penalties, documentation such as a hospital bill, a past-due mortgage bill, or an eviction notice or a college tuition bill are usually sufficient.