Mortgage forbearance related to Covid-19 is ending. Are you ready?

The End of Covid related Mortgage Forbearance?

What is Loan Forbearance?

Over the last 15 or so years, secured lenders have used a process called “forbearance” to help borrowers who were struggling to make their payments. These lenders, usually mortgage lenders on a home or vehicle, would allow a borrower to miss payments for a set period of time without the lender exercising their legal remedies of repossession or foreclosure. Typically, forbearance on a vehicle loan has been limited to 2 or 3 payments at most. This is because a vehicle is a depreciating asset. It loses value over time. However, Mortgage forbearance has often gone on for six months or longer.

When the Covid-19 virus arrived and began to takes it toll on the economy in Spring of 2020, most lenders extended their forbearance policies to include borrowers who lost their job related to Covid. These forbearance agreements were typically for an initial 6 months which could be extended for another six months for a total forbearance period of 12 months.

What happens at the end of the forbearance period?

Once the agreed forbearance period ends the lender requires that a borrower enter the loan modification process. This is where things get pretty tricky.

First, it is important for a borrower to know the status of their loan at the end of the forbearance period. Through working with my clients over the last few months, what I am seeing is that the lenders are actually showing the borrowers account to be “Past Due” in the lender’s computer systems. This is different than what most borrowers were led to understand by the lender. Lender representatives routinely tell borrowers in these situations that their loan is not “Past Due” but that is not true. The loans are not flagged as “Past Due” while the loan is in forbearance but once the forbearance period ends the loan is immediately flagged as “Past Due”. At that point, lenders begin the process of pushing clients into a loan modification or the lender will begin the foreclosure process. This catches many borrowers by surprise.

What are your options as a Borrower?

Most borrowers will be able to enter a “Loan Modification” agreement. In simple terms the loan modification agreement will move the past due payments to the end of the note after a 3 month trial payment period. However, more and more borrowers are being told that they do not qualify for a loan modification through the lender. This can be for many reasons. Some people have experienced financial hardships that damaged their credit. Other people have loans that do not qualify for this type of modification, like a home equity loan.

Another option that Borrowers should consider if they behind on their home loan is to sale the house. Here in the Fort Worth and Dallas area home values have increased substantially. A borrower who is past due on their home may be able to sell the house and pay off the loan. That will resolve the issues with the mortgage, but that person must still find a place to live.

How can Bankruptcy Help?

If you are being contacted by your mortgage lender due to a past due balance on your mortgage loan a Chapter 13 bankruptcy could be an option for you. A Chapter 13 bankruptcy offers several advantages to help the past due borrower regain control of their finances. First, the Chapter 13 bankruptcy will stop foreclosure. Second, a Chapter 13 bankruptcy stops collection activities from all of your creditors. That includes the mortgage lender, the vehicle lender, and your credit cards. Finally, the Chapter 13 bankruptcy can be used to force your mortgage lender to work with you to bring your mortgage loan current. The past due balance of the loan can be paid over 5 years. Under the current CARES act extension you may qualify to have those 5 years extended to 7 years if your hardship was cause by Covid.

Conclusion

As mortgage forbearance ends, most people will be able to work with their banks for a loan modification. MOST lenders are ready and willing to work with their borrowers. MOST lenders do not want to your home. However, for some people, Chapter 13 bankruptcy will be the best option. Bankruptcy is not something to be taken lightly. You should consult with an experienced and reputable bankruptcy attorney to go over your options. My office provides Consultations. I would love to have the opportunity to speak with you and see what option may be best.

Schedule your consultation HERE or call my office at 817-494-3344.