Loan Forbearance Options | BDR
If you got a COVID-19 mortgage deferral, talk to a bankruptcy lawyer about your repayment options.
COVID-19 and Mortgage Forbearances: What You Should Know
The first and most important thing to know is that a loan forbearance, or payment deferral, is not the same thing as loan forgiveness. It’s not even close. If you want to keep your house, the bank will eventually demand that payments be up-to-date.
Forbearances do give you more time. Under the CARES Act, homeowners may generally request a 180-day forbearance by June 30, 2021. Extensions might be available. Generally, the CARES Act forbids banks from demanding proof of hardship or charging extra interest on deferred payments.
When the mortgage forbearance ends, you typically have several options for dealing with the past-due payments. Frequently, we are talking about quite a bit of money. If Fred and Wilma deferred six $2,000 house payments, they owe $12,000.
Many of these options are confusing, and all of them have significant pros and cons. A bankruptcy lawyer points you in the right direction. Then, an attorney goes to bat for you, either with the bank or in court.
As mentioned, most coronavirus forbearances do not require proof of hardship. So, a few people ask for payment deferral even though they don’t urgently need it. Then, they put their mortgage payments in a 90- or 180-day certificate of deposit. Then, when the term ends, they can send the money to the bank and pocket the interest their investment earned.
These families can usually reinstate their loans. They simply pay the past-due amount, and that’s that.
Obviously, loan reinstatement is only an option in a few situations. Chances are, if you did not have the funds to make payments, you probably do not have the funds to immediately reinstate the loan. That’s okay, because we’re just getting started.
During the Great Recession, many banks offered many loan modification options for people who got behind on their payments. Similar options are available for people who had to defer payments because of COVID-19.
Generally, these modifications recapitalize the delinquency into the UPB (Unpaid Principal Balance).
Let’s talk about Fred and Wilma again. Assume they have 100 regular payments remaining on their home loan. The bank might modify the loan and spread the $12,000 delinquency over the remaining payments. So, instead of paying $2,000 a month, they pay $2,120 a month. This is just an example. Their actual payment will be different, because of interest and the modification terms.
Here’s the down side. Mortgage modifications adversely affect your credit score. In some cases, that effect could be almost as big as bankruptcy.
Furthermore, the process often sets homeowners up for foreclosure. Frequently, the bank says you are “pre-qualified” for a modification. After several months of waiting, and several more months of post-coronavirus penalties and interest, the bank unilaterally withdraws the offer. This pattern continues for a while. Then, the bank says you owe too much to qualify for relief, and the foreclosure process begins.
A bankruptcy lawyer can negotiate with the bank on your behalf. These negotiations often quickly secure a mortgage modification which does not affect your credit score.
Chapter 13 Bankruptcy
A wage-earner plan bankruptcy might be last on this list, but it’s not necessarily your last option. In fact, in many ways, bankruptcy might be a better option than reinstatement or modification. Bankruptcy combines a repayment plan with anti-foreclosure protection. That’s something no mortgage modification, or other relief, can possibly offer.
That repayment plan lasts up to five years. So, if they file Chapter 13, Fred and Wilma could repay their $12,000 delinquency at $200 a month. Since the Automatic Stay is in place, the bank cannot force them to pay some money down or foreclose on their loan. In some cases, the bank also cannot charge penalties or interest.
Bankruptcy might have other benefits as well, such as a strip-off. Assume Fred and Wilma’s $200,000 mortgage was an 80/20 arrangement. They have a $160,000 senior lien and a $40,000 junior lien. If their home’s value has dropped to $160,000, the judge could declare that the junior lien is an unsecured, dischargeable debt. That declaration could save them hundreds of dollars a month. Only a bankruptcy lawyer can unlock a strip-off and other advanced bankruptcy features.
So, given the potential savings and potential credit score impact, bankruptcy might be Fred and Wilma’s best option. The applications are obvious. If you obtained a COVID-19 mortgage deferral, you should always have a bankruptcy lawyer review your financial situation.
The coronavirus pandemic and its financial fallout has been very bad on everyone. There’s no need to make things harder on yourself. For a free consultation with a bankruptcy lawyer, contact Bankruptcy Done Right. Virtual and after-hours visits are available.